PERMANENT LIFE INSURANCE AND DOMESTIC ASSET PROTECTION
TRUSTS WORK IN TANDEM FOR HIGH NET WORTH ESTATE PLAN
By Daniel D. Kopman, Esq.
Posted: April 20, 2016
Your married clients have a combined net worth and taxable estate in the multi-million dollar range. Assume that each
spouse has fully utilized their 2015 unified transfer tax credit of $5.430 million by establishing a qualified personal
residence trust (QPRT) and irrevocable life insurance trust (ILIT). In addition your clients have made gifts of interests in
a family limited liability company to a newly created grantor trust while claiming reasonable valuation discounts on the
gifting. Assume further that their estate has no remaining real estate to use for planning purposes besides the client's
personal residence which has already been gifted to the clients' QPRT.
Consider further that your clients are in their middle to late seventies and at least one of them has become uninsurable
since a survivorship universal life or whole life insurance policy as the case may have been was purchased in the ILIT.
Notwithstanding their respective ages, your clients combined life expectancies remain sufficient lengthy such that on the
death of the surviving spouse, a taxable estate equal to 25-30 million dollars is a realistic possibility; so too is the
prospect of an estate tax bill in the $12-plus million dollar range even after all of the above discussed estate planning
techniques have been applied.
An enviable position notwithstanding, heirs will be no doubt face a shocking revelation when forced to write a check to
pay that IRS estate tax liability. The tax sting might not be so painful were your clients to currently embrace the next level
of estate planning available to them. Going such route will surely necessitate their parting with money now however
proper planning of the sort discussed herein will hardly impoverish mom and dad.
Combining a split dollar loan, permanent life insurance and a domestic asset protection trust will likely result in a lower
tax bill and commensurately a bigger inheritance to your clients' children. The plan as executed entails parents
establishing a self-settled domestic grantor asset protection trust in a favorable jurisdiction. Children and grandchildren,
if desired, are the named beneficiaries of the trust. The parents will make a split dollar loan regime extension of credit to
the trustee in exchange for a promissory note covering all if not a substantial portion of the policy to be purchased.
The trustee purchases an indexed universal life insurance policy or policies on the life of any or all children or
grandchildren. The policy should be of the sort that enjoys a portion of any growth of the index it mimics such as the
Standard and Poors 500 but is limited such than the cash value will not be reduced should that index decline. The loan
will be structured with a maturity equivalent to the insureds' life expectancy(ies) and importantly not that of their parents.
The funds so borrowed by the trustee will be invested and used to pay policy premiums as desired, whether in the form
of a single premium in year one or spread out over several years sufficiently to avoid modified endowment contract
(MEC) status. If premiums are structured so as not to cause the policy to be a MEC, distributions from the trust to
beneficiaries, typically funded with policy loans will not be taxable events. That will be important if say lifetime
distributions from the policy and access to cash value are contemplated.
The permanent life insurance policy will continue to grow free of income taxes and ultimately on the passing of the
insureds, the death benefit will be distributed income tax free and outside of the parent's estates. To the further benefit
of your clients, an estate tax discount may be available on the balance of the loan as of the death of the surviving
spouse on grounds that the note is worth less than face value given the uncertainty as to maturity (i.e., when the
insureds will be deceased).
While the note discount and policy value growth free of income, gift and estate tax provide considerable benefits in of
themselves, the discount afforded the note in the parents' estates adds an element of tax savings which will reduce
substantially parent's estate tax liability as discussed above and as the endgame maximize the residual amount inuring
to your clients' children and heirs when your clients have passed away.
The asset protection trust plan comes at some additional cost. While it is an optional component, the value of
maintaining the policy in an asset protection trust will far outweigh the added cost because it will help defend the
contents of the trust against attacks by creditors of the beneficiaries including claims by former spouses and the like
given the significant length of time that trust may be in existence.
The Alchemy of Converting Non-Performing Life Insurance Policy into a Charitable Gift with Valuable Income
By Daniel D. Kopman, Esq.
Posted: February 9, 2015
A sixty-five year old policy owner finds himself with a policy which is about to lapse for want of adequate cash value.
Given his age, health, the nature of the policy in question and prospective mortality costs, he cannot justify in his mind
making additional premium payments to keep the policy in force, raising the specter of lapse. He is looking at simply
walking away from the policy after having paid-in years of premiums.
What if, instead he found a strategy by which not only would he be able to put some of the value from that policy back
in his pocket but, also through which he could make a significant tax deductible charitable gift to a charity? Coupling the
power of gifting with a significant charitable income tax deduction under Internal revenue Code § 170 allows our policy
holder to "do well by doing good" as the old saw goes.
He may attempt to find a qualified charity of his of his choice that would be willing to accept the policy and the
obligation to make premium payments until he died. Finding a willing recipient under such conditions would be like
finding the proverbial needle in a haystack.
A recently established charitable foundation has been formed to solve this conundrum. It works like this. Our policy
owner, let's call him Frank, gifts the policy to the Foundation, thus making him eligible to deduct the fair market value of
the gift as a charitable itemized deduction subject to annual limits on such gifts to foundations. Similar policy gifts to the
Foundation by approximately 300 others like Frank will be grouped together in a single accountable unit (the "Book").
The Foundation bears the cost of making annual premium payments on all of the policies through a line of credit
established for the Book. Frank is not involved with the Charity and thus has no personal liability or exposure for the
Importantly, like Frank, each of his fellow donors specifies what charity will receive the proceeds of the policy he or she
has gifted to the Foundation. The end result is that Frank has now created a valuable income tax deduction from an
otherwise valueless policy and has also made a gift to his chosen charity at no effective cost to him. Moving on, as each
of the policy owner-donors dies, the foundation collects policy proceeds, pays off the debt service associated with
financing the premium payments and pays a pro-rata amount of the net proceeds received in a given year to the charity
selected by each donor, according to the percentage the donor's gift bears to gifts by all donor-participants in the Book.
The immediately apparent benefit is that Frank's charity is not forced to wait until his demise to receive the bequest.
Deaths of others in the book occurring in each tax year result in a release of money from the Foundation to Frank's
charity for each such year. Frank's enjoys the benefit of knowing his charity is receiving an annuity (albeit not a fixed
amount each year) and presumably receives acknowledgment while he is alive. Frank's chosen charity receives money
sooner which it can put to good use.
The ideal facts supporting this planning scenario include: policy owner over 65 years of age with health issues, and
universal life or term convertible life policies valued in the range of $500,000 or more.
If you come across a client fitting the above profile, we would be please to explain the process further.
Leveraging Income and Transfer Tax Free Growth By Combining ILIT's and Universal Life Insurance
By Daniel D. Kopman, Esq.
Posted: October 6, 2014
There are few remaining Congressionally sanctioned tax shelters. One of them is the receipt of income tax free life
insurance death benefits. (Internal Revenue Code §101.) Another involves parents making "annual exclusion" gifts to
their children which are neither taxable for gift tax purposes nor do they utilize any of a taxpayers lifetime unified gift and
estate tax credit. (Internal Revenue Code §2503(b).) Gifts made during 2014 are limited to $14,000 per donor to any
child or other donee, so jointly parents can transfer tax free $28,000 to each child. The combination of these two
techniques provides a leveraging of tax benefits. Establishing and funding an irrevocable life insurance trust (commonly
known as an ILIT) with permanent life insurance provides the straight forward route to enjoy these tax benefits. While
whole life policies remain an attractive form of permanent life insurance with which to fund your ILIT alternatively
permanent insurance unbundled, transparent and built on a universal life chassis provides greater design flexibility and
generally more control over the financial performance of the income tax free growth of the trust corpus.
More specifically, indexed universal life insurance (IUL) offers potential for achieving cash value growth which is
correlated with stock market indices, often the S&P 500 while eliminating decreases in value with stock market
downturns by incorporating a reset. The policy grows when the market is moving up (subject to caps on annual growth
rates) but does not decline in value during market corrections. In other words the policy captures market upside while
being protected from downward moves in the market – a feature not available with variable life insurance policies.
Returning to the mechanics of gifting, parents working with their estate planning attorney and life insurance
professional, design an IUL policy typically focused upon providing the largest death benefit which can pass income tax
and estate tax free to their children for the lowest insurance premium payments.
Typically planning starts with planned annual premiums equal to the annual exclusion available, $28,000 in the above
example. The trustee of the ILIT purchases individual or survivorship insurance one or both parents naming the trust as
beneficiary. Annual compliance with the notice requirements under Crummey v. Commissioner (citation omitted) - a
simple but important step - will ensure the annual gifts will satisfy the present interest requirements and thus be free of
gift tax. For those wanting to build greater policy values than those curtailed by the $14,000 per child/beneficiary limit,
taxable gifts can be made in addition to annual exclusion gifts. In such case there will be no out-of-pocket gift tax due
until each donor's lifetime unified credit (currently $ 5.34m) has been fully utilized. Alternatively, split-dollar techniques
can be used to leverage cash value growth and maximize the death benefit.
The below table (Omitted) is provided only to illustrate the mechanics of potential growth of cash value and death
benefit and, importantly, may or may not represent product/results currently available in the insurance marketplace. The
sales illustration should always be reviewed in connection with a contemplated policy. The table represents a
survivorship universal life policy which, for simplicity sake, utilizes a fixed crediting rate. Husband in the illustration is 56
years old and his wife is 51 at the time the trust is funded and policy procured. Maximum annual exclusion gifts fund the
annual $28,000 premium payments by the trustee for fifteen years.
This policy provides a $1,200,000 death benefit guaranteed for 44 years at which time the insureds would be 99 and 94,
respectively. Suitability of an ILIT and the policy used to fund the trust must first be assessed by advising professionals
before incorporating the above strategy. Because the above strategy yields both income tax and estate tax savings,
those exposed to both of these tax bases will enjoy the greatest benefit. That said, even those with estates which fall
below the value threshold for taxable estates can benefit from income tax free access by the trustee to cash value as
well as the non-taxable death benefit. Moreover, by their nature, ILITS provide an excellent asset protection both to the
trust settlor parents but also the children as trust beneficiaries if the trust incorporates the proper protective provisions.
The above information is provided for general information purposes only, and does not constitute legal advice.
Successful implementation of the above-described techniques requires careful consideration of facts particular and
unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney
Self Directed IRA's Provide Expanded Investment Choices For Those With More Exotic Investing Desires
By Daniel D. Kopman, Esq.
Posted: August 13, 2013
Every few years we see renewed popularity of Self Directed Individual Retirement Accounts (SDIRA's) also known as
Checkbook IRA's. To avoid confusion the "self directed" label is a bit of a misnomer in the sense that individuals
investing in IRAs generally select their own investments from choices offered by their IRA custodian and thus self direct.
Checkbook IRA is perhaps a better and more popular descriptor for such retirement vehicle. In brief, the purpose for the
checkbook IRA is to allow IRA owners access to a broader and, in some sense, less traditional investment choices.
Choices include real estate, precious metals, private placements, debt instruments and other alternative investments.
Other investments such as permanent life insurance and collectibles, some of which would be available investments in
qualified retirement plans, remain ineligible investments with a checkbook IRA just as with any other form of individual
retirement account. The attraction with these vehicles lies in the fact that People want to control their investments to a
greater extent than would be available with traditional bank or brokerage IRA's.
Conceptually the IRA custodian allows your IRA to own all of the interests in an LLC and appoint you, the IRA owner, as
the manager of the LLC. Caveat: The problem with that structure is that it is an attempt to get around the statutory
requirement that an IRA have a custodian or trustee. Importantly though, the IRA has not formally objected to
qualification of Checkbook IRAs. Proponents cite Swanson case, 106 T.C. 76 (1996) as justifying the IRA owner serving
as manager of the IRA's single member LLC.
There are prohibited transaction and unrelated business taxable income issues to be addressed in each situation. If
there is a prohibited transaction in an IRA, you are immediately taxable on 100% of the account. By contrast with a
qualified plan there is simply an excise tax, usually only 15% of the amount involved suggesting less risk in making these
investments in a qualified plan if that is an option. Perhaps the most important due diligence to perform is to investigate
the background of the promoter and would-be custodian being considered. Remember that whenever granting custody
of your assets, there is the possibility for fraud and embezzlement. While not an investment vehicle to shy away from in
the grand scheme of things, proper vetting and planning is the key to success or failure. If you decide to explore this
option, give us a call. Sound tax law advice can make the difference between a good and a disastrous result.
How Inflation Indexing Will Impact Your 2014 Taxes
By Daniel D. Kopman, Esq.
Posted: October 7, 2013
While inflation has not been soaring this year, it will still affect your income and estate taxes. The official IRS inflation
factors will not be released until later this year, however, we have it on good authority where the inflation rate is likely to
shake out. Economists at Northwestern University and CCH estimate that the official inflation rate used to adjust the
numbers will be about 1.6%, which is lower than last year's 2.5% rate and 2011's 3.8% rate. Their estimates are based
on data released by the U.S. Department of Labor. Congress added inflation adjustments to the U.S. tax system in 1980
to ameliorate the effects of taxpayers being pushed into a higher tax bracket because of inflation.
Pease Itemized Deduction Limitation Congress reinstated the personal-exemption phase-out and the limitation on
itemized deductions in 2013. Each limits the value of certain tax benefits for higher-income taxpayers, and both have a
current threshold of $300,000 of adjusted gross income for joint filers ($250,000 for single filers). This will rise by a few
thousand dollars in 2014 as those threshold limitations are indexed under the Internal Revenue Code. AMT Exemption
Rises In 2013 lawmakers permanently indexed the alternative minimum tax for inflation. Prior to the change, Congress
had to pass one- or two-year patches to keep inflation from greatly expanding the AMT base, a separate levy that
rescinds the value of some benefits.
The current $80,800 exemption for joint filers is likely to increase to $82,100 in 2014. For single filers it will rise from last
year's $51,900 to $52,800 next year. Individual Retirement Accounts While inflation adjustments are in many instances
rounded down to the nearest $50, special conventions apply in other circumstances. Individual retirement account
contributions, including those made to Roth IRA's are adjusted for inflation. The adjustments do not kick in until the
cumulative increase grows to $500. No change to the $5,500 contribution limit is expected for 2014, although some
income phase-outs will likely rise slightly.
The annual gift-tax exclusion will remain at $14,000, consistent with 2013. In years 2009 through 2012, it was $13,000.
The exclusion inflation adjustment rules as crafted require a cumulative increase of $1,000 in inflation before any
adjustment is made. So we may not see an increase her for a while until inflation starts to pick up – Good news and bad
news. Finally, the most significant change for individual in 2014 will be an increase in the lifetime gift and estate tax
exemption to $5.34 million, which represents a $90,000 increase in each individual's $5.25 million exemption in 2013.
Together, spouses who fully utilized their 2013 unified credit may gift an additional one hundred eighty thousand dollars.
1031 Exchanges Are One of Few Remaining Viable Tax Shelters
By Daniel D. Kopman, Esq.
Posted: September 6, 2013
The combination of deferred income tax provisions on real property exchanges combined with effective planning with the
continuing provision for death basis step-up, permit profits in real estate in properly structured transactions to escape
taxation in perpetuity. A like kind, or tax deferred exchange as such transactions are commonly known, can override the
general rule that a sale or exchange of real property is a taxable event. That is to say, if a taxpayer enters into a like-
kind exchange whereby he or she exchanges one property held for business or investment for another property of like-
kind the taxpayer is able to defer recognition of gain or loss. The theory behind the like-kind exchange rule is that the
replacement property, in substance, is merely a continuation of the old investment because, in the eyes of the IRS,
there has been no liquidation. That said the law provides for no current recognition of gain or loss. To preserve the
unrecognized gain, the Internal Revenue Code requires that the basis of the old property carry-over into the new target
or replacement property.
The holding period "tacks" on to the new property so that the accrual of time of ownership in the relinquished property
renders the newly acquired property eligible or nearer to eligibility for lower tax rates on long-term capital gains. While of
course some exchanges are just that – swapping of two properties between two owners, most exchanges are really a
"fiction" in the sense that Party A sells his property, "Whiteacre", to party B, and then acquires another parcel from Party
C. Moreover, the actual or fictive exchange need not be simultaneous. That said the Code contains strict time limits for
qualification of a non-simultaneous exchange. Among other requirements, the taxpayer must identify the replacement
property within 45 days after the date of the transfer of the relinquished property and must acquire the replacement
property by the earlier of 180 days after the date the former property was relinquished, or the due date of the tax
payer's income tax return for the year in which the transaction occurred.
The Treasury Regulations do recognize that real estate transactions can and do fall apart. Accordingly, taxpayers are
not penalized for identifying more than one replacement property as long as they do so within the above-described 45
day identification period. Taxpayers may identify up to three properties without regard to fair market value (the "3-
property rule"), or any number of properties as long as their aggregate fair market values does not exceed 200% of the
aggregate fair market value of the relinquished properties (the "200% rule"). The Regulations permit a taxpayer to timely
revoke an identification of a property as a replacement property if the revocation is affected by amendment to the
original written document and filed before the end of the revocation period with the parties who received the original
identification. Most real estate professionals are aware of the requirement that the replacement parcel(s) must be at
least of value equivalent to the relinquished property to avoid partial or comprehensive recognition of income tax on
gain realized. Some, however, are not aware of the rule of "boot". Debt paid off in the sale of the relinquished property is
considered receipt of taxable boot which will cause a portion or indeed all of the gain realized on the deal to become
currently taxable unless secured indebtedness is undertaken in regard to the newly acquired property.
Stated differently, the new indebtedness is netted against and offsets the above-described boot received in the
transaction. Realized gain is recognized, up to the whole thereof, to the extent of any deficiency in boot netting. Partial
taxable gain may also accrue when personal property, such as furniture and furnishings, are included in the transaction,
but not fixtures, i.e., that which would otherwise have constituted personal property but for the fact that it is so affixed to
the real estate or wrought into the property that removal would cause a measurable diminution in value of the property
or impracticality. Another well known requirement is the mandatory use of an "accommodator"; essentially a straw
person to custody the proceeds of the sale pending their reinvestment. This express requirement avoids taxation cause
by what is known as "constructive receipt." Certain of our clients have moved through ownership of 4 or five properties
in a lifetime without recognizing any taxable gain or liability. Because heirs of taxpayers continue to enjoy a step-up of
cost basis on death, the "deferred" gain in the property is effectively forgiven, meaning that children taking title through
their parents can turn around and sell an inherited property which is the fruit of one or more tax deferred exchanges one
day after their parent's death and pay no income tax on such transaction or, alternatively, can maintain the property and
receive a new depreciable basis at fair market value.
The combination of tax deferral and step-up renders property transactions properly planned for effectively tax exempt.
Few other provisions of the Internal Revenue Code individually or in concert can compare with the economic benefits of
a Section 1031 exchange. What should be evident from this discussion are the significant economic benefits of
qualifying eligible transactions as Section 1031 exchanges. However, given that even small missteps can trigger a
federal and state income tax disaster, it is important to work with an experienced tax/real estate attorney to backstop any
issues. The parameters are tight and unforgiving. The Service does scrutinize 1031 transactions very carefully, looking
for disqualifying features. The cost of protecting the transaction from errors using qualified counsel far outweighs the
risk of implosion under successful IRS scrutiny.
IRS Proposes De Minimum Exception to Money Market Fund Wash Sale Rules
By Daniel D. Kopman, Esq.
Posted: August 31, 2013
Responding to concerns about pending SEC reforms in the money market industry that could trigger the “wash sale" tax
rules, the IRS has proposed new tax relief. The Securities and Exchange Commission wants to alter valuation of money
market funds used by institutional investors to floating net asset value a price; as contrasted with the historical flat $1
per share value we have known for many years. The reform results from the panic that ensued in the money market
industry in 2008 when the Reserve Primary Fund could not maintain the stable $1 per share price owing to losses
sustained on Lehman Brothers debt and the fund “broke the buck” (A term popularized by CNBC). Investors are
concerned that switching to a floating NAV may trigger the wash sale tax rules, which prevent investors from recognizing
losses on the sale of securities if they bought similar shares within 30 days before or after the sale. On Wednesday the
Service issued Notice 2013-48 announcing it may establish a de minimus exception to the wash sale rules for certain
money market fund share redemption under recent SEC regulations proposing abrogating the constant share price.
Under the proposed revenue procedure, a loss upon a redemption of certain money market fund shares of less than
500 basis points would be exempted from the wash sale rules. The prospective IRS rules may not apply or, indeed, may
differ from those proposed should the SEC rule, as adopted, be materially different than in its present form. The IRS
seeks comments on the proposed revenue procedure.
Forbes Highlights Tax Savings Responsible For Renewed Popularity of Charitable Remainder Trusts
By Daniel D. Kopman, Esq.
Posted: August 23, 2013
The investing section of the September 2, 2013 issue of Forbes magazine highlights the significant upswing in the use
of Charitable Remainder Trusts known as "CRT's". The technique allows owners of significantly appreciated assets to
exercise their charitable inclination while simultaneously realizing significant income tax savings. Pretty much any type of
asset qualifies from the most common and prosaic of assets, such as marketable securities, to the more exotic, vintage
and collectible objet d' art, automobiles, etc. Clients are motivated by the desire to create cash flow from otherwise non-
income producing assets and the ability to do so without liquidating the assets and incurring capital gains. If your CPA is
savvy in charitable planning for income and estate taxes, her or she may spot the opportunity and, in reaction, may start
spouting acronyms like CRUT, CRAT, NICRUT, NIMCRUT and Flip-CRUT.
While these acronyms may sound foreign to some and to the more squeamish taxpayer, even Kafkaesque, patience and
attention to detail portends significant benefits and recognition. By way of quick background, the significantly higher
federal tax rates imposed upon all of us by Congress in 2013 have resulted in re-popularizing the above variants of
Charitable Remainder Trusts to much the same extent as when these techniques first appeared in the tax laws more
than four decades ago. This tipping point has resulted because those high income individuals who were otherwise
charitably inclined, but for significant tax advantages, have become motivated toward largess largely due to the new tax
advantages. The article cites one client who is planning to establish a CRT for his $350,000 collection of Japanese
figurines, and others who have given away significant amounts of gold bullion and even a da Vinci painting.
Here's how the structure works: After you have targeted the item to be gifted and the charity which will serve as
beneficiary of your trust, you contribute the assets to the trust which, because it is a tax exempt entity, turns around and
sells the asset without any capital gains. Had the client sold the painting or other asset, he would have incurred capital
gains tax resulting in a significant opportunity cost of the ability to endow a much larger charitable plan on a tax free
basis. The damage done in 2013 would be greater because the top rate for capital gains went from 15% to 23.8%.
Contributing the asset to the CRT also eliminates state income taxes on otherwise significant gains on the sale of the
asset. The new federal rate includes the ObamaCare 3.8% tax on net investment income for individuals with sufficiently
high Adjusted Gross Income (AGI).
The 3.8% tax rate is invoked for couples with over $250,000 of AGI and the 20% capital gains rate is triggered at
$450,000. Above $250,000 in AGI the tax rate on paintings and other collectibles is 31.8% (up from 28%) and
depreciated real estate gets hit with a 28.8% rate, up from 25% in 2012. Once the trust sells the asset(s), the trust pays
the donor a fixed percentage of the principal as revalued each year (Charitable Remainder Unitrust or CRUT) or an
annual annuity, the amount of which is fixed when the trust is established and funded (Charitable Remainder Annuity
trust or CRAT). The payment structure can be designed to continue for a fixed number of years or for one or more lives,
at the conclusion of which the contents of the trust are distributed to the charitable beneficiary. The recipients of the
annuity payments can be other that the donor such as parents or children. The most significant restriction imposed by
the IRS (to establish the bona fides of the trust's structure, i.e., so that it will not be functionally a tax dodge) is that the
remainder amount distribute to the charity must be at least 10% of the value of the initial trust value. In addition to the
benefit of knowing that as a donor you have done good by your charitable gesture, you also do well by enjoying the up-
front income tax deduction for some or all of the value of the remainder interest ultimately given to charity.
Of course, higher income donors enjoy greater benefits from CRT's because the deduction shields income at higher
income tax rates. The 10% rule mentioned above facilitates a generous payout even for those not singularly motivated
by a big tax deduction. Consider the case of a recently retired 59 year old Philip Morris executive who placed
approximately $1,000,000 of low basis stock into a CRUT which will pay him 8.7% of its balance yearly for the remainder
of his life and that of his 58 year-old wife, leaving a mere 10% remainder balance to a university. The donors view it as a
positive that their annuity payments will shrink as the years pass because they will not need as much income once they
turn 70 ½ years of age at which time they are forced to take larger minimum distributions from their retirement plans.
This can linearize income which will prevent bunching of income into certain years and resulting higher marginal income
tax rates that bunching causes. Sometimes, the only assets available for gifting are non-income producing, like
undeveloped land and stock in closely-held businesses.
For these circumstances, taxpayers can use the Flip-CRUT variant which begins as a trust that won't make payments to
donors unless there is current income sufficient to do so (NICRUT or NIMCRUT) and converts (flips) to a regular CRUT
once the trust corpus property is sold. One excellent thing worthy of mention is that the above-described techniques are
inherently safe in that they have the blessing of Congress and the IRS. That cannot be said of some other types of
estate planning techniques which offer comparably aggressive tax benefits. For many, such as a former AT&T
sales director discussed in the article, the object is to integrate gifting strategies with retirement income planning. In the
above-mentioned case, the taxpayer timed the gift so that the partial use of available charitable income tax deduction
from the funding transaction substantially wiped out taxes from a partial Roth IRA conversion completed during the same
tax year. In that case, there will likely be unused deduction to offset taxes resulting from distributions from the trust in
future years. With a Roth IRA, once taxes are paid on the conversion, all future growth and distributions are tax free.
Because of the way the ordering rules are structured for taxation of CRUT payments (assumes highly taxed ordinary
income is paid first, then capital gains, then tax exempt municipal bond interest, and lastly the initial investment in the
asset placed in the CRUT tax free), high income taxpayers will enjoy substantial income relief because eliminating
taxable income from the Roth leaves less highly taxable ordinary income from the CRUT payouts.
Investment Status of REIT's
By Daniel D. Kopman, Esq.
Posted: August 23, 2013
Investors ran to real estate investment trusts in 2012, attracted by evidence of a housing rebound combined with
historically low yields on other traditional investment products. REIT's, many of which trade like stocks on major
exchanges and invest in commercial or residential property, mortgages or a combination thereof, delivered in spades. A
BANNER YEAR Through mid-October 2012, US Equity REITs returned 19.4%, exceeding the 17.9% gain in the S&
P 500 Index, according to the National Association of Real Estate Investment Trusts. Global real estate funds also rose
in 2012, up 25.6% through early November making them the best-performing sector according to Morningstar. REITs
also provided results for investors thirsting for yield. On average, US equity REIT dividend yields were 3.2% through the
first three quarters of 2012, well above the 1.8% and 2% respective yields for 10-year Treasury notes and the S&P
500. With returns like that, it's not surprising that REIT exchange-traded funds (ETFs) had net inflows of almost $7
billion through October, according to Morningstar. NO GUARANTEES It's important to remember that past performance
is never an indicator of future results (i.e., past is not prologue). Just because REITs had a strong showing through most
of 2012, they won't necessarily continue to outpace broader indexes.
Also, there's no certainty that housing will continue to rebound, despite several promising signs. Mortgage rates,
however, remain near historic lows and there's an imbalance of supply and demand emerging in a growing number of
local markets, auguring well for a continued housing recovery. There are likely to be bumps in the housing recovery
road. But it appears that rates will stay near their historic lows, allowing more time for buyers who may have been
delaying a purchase to act. NOT ALL REITs ARE ALIKE REITs come in many flavors. While some are concentrated in
specific local markets, others are widely diversified across regions or even countries. Some specialize in certain property
types, such as office buildings, shopping malls, apartments, warehouses or hotels, while others invest in a combination
of properties. And each category of REIT performs differently. In 2012, REITs based on retail properties did particularly
well. The group posted average total returns of more than 23.6% through the first 11 months of the year, according to
NAREIT. Timber REITs, which have more than 50% of their asset value in property involved in forestry products, also
shined, gaining more than 33% during that time period. REITs that specialize in lodging and resorts lagged, with a total
return of 5.5%; residential REITs trailed the group with a total return of 2.7% through the end of November.
Mortgage REITs, which invest in pools of mortgages, also known as "mortgage-backed securities," were among the
stronger performers through most of 2012, rising 18.9% and 39.2%, respectively, for home and commercial mortgages;
according to NAREIT. But these REITs also were among the most volatile-they tumbled 6% in one week in October
alone. Mortgage REITs can be challenged by declines in interest rates, which spur mortgage refinancing. When a
mortgage refinances, the REIT usually needs to reinvest assets, typically at a lower rate. DIVERSIFY, DIVERSIFY,
DIVERSIFY Because all REITs are not created equal and perform differently, investors need to be especially mindful of
diversification. If you are interested in managing a portfolio of individual REITs, diversification is crucial and should be
part of a broader investment strategy. Holding at least five to 10 individual names may be necessary in order to achieve
adequate diversification. Investors should diversify across several different property types and also by geographic
region within the REIT portion of a more broadly diversified portfolio. Investors can visit company websites to learn more
about REIT property investments. The bottom line for investors is that while REITs on the whole have performed well
during the prior three years, there's no certainty that out performance will continue.
If you want to invest in property via publicly traded companies, remember to spread your investments over several
REITs. It is also important to keep in mind the tax consequences of REITs. These investments must distribute 90% of
their income to shareholders as dividends and those dividends are taxed at the shareholder's marginal income tax rate.
Escape Paying Taxes on Your College Student's Investment Income
By Daniel D. Kopman, Esq.
Posted: August 16, 2013
Tax Planning Arbitrage to Avoid the Kiddie Tax 1986 resulted sweeping tax legislation, the breadth of which had not
been seen since 1954. Among the then new provisions was the "Kiddie Tax" designed to avoid tax rate arbitrage
resulting from parents shifting their income to a child's lower marginal income tax rate. Originally, the mandatory
inclusion of children's income in the parents' income taxes at a higher marginal tax rate was no longer required after the
child's 14th birthday. That changed, however, when the age threshold was increased to 24 for children who are still in
school – pretty much all children these days. There is, however, a creative tax planning opportunity to circle around the
kiddie tax that works for college students. The opportunity exists because there are so many disjointed soak-the-rich
provisions in the tax code that on occasion they cancel each other out. Penalties are not limited to the Kiddie Tax, and
include loss of personal exemption and loss of the ability to avail themselves of the American Opportunity Tax Credit for
tuition which is worth $2,500.
Consider the scenario where parents have a marketable security they would like to sell resulting in a $10,000 long term
capital gain. Parents have a kid in college but, because their income is more than $180,000, they are ineligible for the
tuition credit. Let's further assume that the parents cannot claim personal exemptions because either their income is
above $422,500 or they are subject to the Alternative Minimum Tax. Instead of selling the stock, mutual fund, exchange
traded fund, etc., the parents might consider gifting the stock to the child who sells it to cover the tuition bill. Parents
must not list the child on their return as a dependent as they are ineligible in any event in this case. The child then
reports the capital gain on his or her return and the capital gains tax is effectively wiped out by the tax credit. In effect,
the Kiddie Tax disappears, which is what happens when the tax code comes after taxpayers from three directions. All is
not lost if you do not qualify for the above-discussed tuition play.
Consider also the earned income escape hatch where the child living frugally (working part time and attending a cheap
state college or more costly institution and receiving a merit grant) is able to cover half of their living expenses, including
tuition, from wage or salary earnings, making them eligible for being taxed separately from the parents. That means the
child can claim the personal exemption worth $3,900 for 2013, and the full standard deduction of sixty-one hundred
dollars. With these advantages, junior can seize upon a 0% tax rate on dividends up to where his income hits $36,250.
What if the Kiddie is too young to work. In such case, the $2,000 tax grace allowance against the Kiddie Tax may be
appealing, providing for a two year old with a $90,000 stock portfolio paying no tax on dividends.
How Familiar Are Your With California Mello-Roos Taxes
By Daniel D. Kopman, Esq.
Posted: August 2, 2013
Although Mello-Roos taxes have been around since 1982, prospective buyers of homes are becoming more savvy of its
implications. As buyers dig deeper, they discover that Mello-Roos is simply a special tax assessed to homeowners in a
community as repayment for bonds used to fund the infrastructure within their community. The bottom line to the buyer
of a home in a Mello-Roos community is that they will have to pay this tax in order to repay the municipal bond. This
would be in contrast to a non Mello-Roos community where the infrastructure and services would be paid for by the
surrounding residents or the actual builder.
The taxes imposed can add substantially to homeowners' annual property tax bill. Briefly, the term Mello-Roos was
derived from the names of its co-authors and generally termed as the Community Facilities District Act (CFD). The CFD
started when people in California voted for Proposition 13 in 1978 to limit property taxation. Therefore, new initiatives
were considered to finance public constructions and improvements. In 1982, the California State Legislature made Mello-
Roos legitimate. After passing a community vote with two thirds in favor of becoming a Mello-Roos district, bonds are
issued to help fund the community infrastructure. Normal services and infrastructure would include police services,
schools, roads, ambulance and fire protection services, utility connection, sewer lines, and street lights.
Once Mello-Roos is established, residents must repay the bonds in order to fund ongoing projects. A special tax is
assessed to the homeowners as the repayment method and levied yearly. An ongoing lien is used to make sure that the
taxes are safe and secured. The duration of the tax varies from one subdivision to another but fifteen years is about
average. Payment rarely extends fewer than 7 years or in excess of thirty years. In Los Angeles County, Mello-Roos
taxes will be found in developments on the outskirts of its original metro-suburban nucleus because that is where the
action in building new communities has been. For that reason, home-seekers will almost always find these taxes in
communities such as Newhall and Simi Valley, in the Northern portion of the County.
In Orange County, most cities with new construction will have at least one Mello-Roos development. Because there are
newer developments in South Orange County, buyers in most South Orange County will find the taxes on their tax bill;
inculpating such communities as Irvine, Mission Viejo, Aliso Viejo, Tustin, Laguna Hills, Rancho Santa Margarita, Coto de
Caza and San Joan Capistrano. Rarely do homeowners forced to pay these tax levies speak favorably of them.
However, to be fair, taxpayers should consider the benefits of parks, recreation centers, hygiene and sanitation benefits
and other perquisites which, but for those taxes, they would not have access. The thought might dull the pain of writing
that tax check, at least for a moment.
Horrors Abound: The Importance of Business Succession Agreements
By Daniel D. Kopman, Esq.
Posted: July 31, 2013
A cavalcade of horror stories reminds us of the importance of business succession planning and, importantly, planning
for resolution of disputes among active business partners. Nowhere is this seen more demonstratively than in the case
of a father and son investment management practice in Dallas. In her excellent article in the July, 2013 issue of REP
Magazine entitled "When a Family Team Falls Apart" author Megan Leonhardt spins the yarn in a tale of viciousness,
treachery and betrayal in the aftermath of the breakup of a father and son family advisory practice in 2008.
The son, Chris Wanken, sued his father for fraud and misrepresentation, accusing him of hacking into his bank account
and even causing the death of Chris' mother. The case resulted in the proliferation of voluminous lawsuits, as well as a
FINRA (securities industry self-regulatory organization) disciplinary and expungement action. Litigation went on for some
five years at the state and federal level including fisticuffs in federal district court in Texas, Texas appeals court, the
Texas Supreme Court, U.S. Court of Appeal for the 5th Circuit and the U.S. Supreme Court (SCOTUS). Everything is
bigger in Tejas! Wild flung claims included stalking, harassment, a groundless custody suit and threats of physical
violence, all culminating in a wrongful death suit – something rarely encountered in partnership and corporate
dissolutions. In a somewhat understated concession, the article points out that father and son agree that a written
partnership agreement would have prevented much of this maelstrom, let alone would have spared the litigants of legal
fees in the high six-figures, and possibly the permanent destruction of family relations. At least they are in agreement
While the Alice in Wonderland scenario about which Leonhardt writes may be an outlier, wisdom can come in hyperbole.
While family business break-ups are among the nastiest out there, owing to the added emotional and relational
baggage, best practice dictates that business partners should never forego the written agreement. While governance
issues can be dealt with in a partnership or operating agreement or in corporate bylaws, the classic business
succession agreement, such as the sort that the Wankens regret not having prepared is neither a time consuming,
combative or costly proposition.
Whether in the form of a redemption or cross-purchase agreement, skillful design and implementation is crucial, and
must optimize the creation of liquidity, such as with the use of life insurance, and tax optimization. Attorneys with estate
planning and corporate experience are best suited to advise clients on their rights, including separate counsel for the
business entity and each of its respective owners. The bottom line is that at the time of entity creation, agreements
dealing with death, disability and dissolution should never be dispensed with. We have considerable experience in
corporate consulting and planning for succession of business ownership. We invite you to call us should you have any
Obama Wants to Limit the Size of Your Individual Retirement Account
By Daniel D. Kopman, Esq.
Posted: July 12, 2013
The White House budget would limit tax-deferred retirement account contributions. The fiscal 2014 budget released in
April proposed a cap on tax-deferred retirement savings. There has been significant push-back. It is widely known that
Americans' have failed miserably to set aside sufficient retirement funds. However, even people fortunate to have
accumulated seven-figure nest eggs feel the pain because of a triad of low interest rates, volatile markets, and
increased life expectancies, all of which have limited the sums that may withdraw each year without running out of funds.
The cap proposal would be draconian but modestly straight forward in application, limiting small percentage of
retirement savers from continuing to contribute to their 401(k) savings plans, IRAs, and even pensions, once they'd
exceeded the ceiling imposed by the cap. Savings in excess of that amount would not enjoy the tax benefits of future
retirement-plan contributions. The cap would add one more layer of restrictions for the wealthy on the existing annual
limits on contributions to 401(k) plans and IRA accounts, as well as on the nondiscrimination rules that prohibit company
retirement plans from favoring highly compensated employees over other workers. No distinction is drawn between
traditional IRAs and Roth IRAs as the restriction would apply equally to both. As detailed in the Treasury Department's
256-page Green Book (aka General Explanations of the Administration's Fiscal 2014 Revenue Proposals), the capped
amount would be equivalent to the amount needed to buy an annuity starting at age 62 worth $205,000 a year.
Under the administration's own "fuzzy math" today that amounts to total retirement savings of $3.4 million. That number
would likely increase with time since there would be cost-of-living adjustments applied to the cap. But, since annuity
prices are tied to interest rates, as rates increase the more lifetime income you can get for your money and, thus, the
maximum allowed may also be lowered and, possibly dramatically, should (i.e., when) rates increase. If rates were to rise
from today's historic lows to say a not-unrealistic 8% the capped amount could drop to about $2.3 million, as calculated
by the Employee Benefit Research Institute (EBRI). But consider that as the conversion between annuities and actual
dollar amounts of savings is based on actuarial assumptions, the cap would necessarily be age dependent. In an 8%
interest-rate environment, a 25-year-old might max out at a meager $131,807. In contemplating the number of impacted
taxpayers, interest rates must be considered.
Today, just 0.1% of individuals ages 60 or older have balances totaling $3 million or above in their combined 401(k) and
IRA accounts, according to EBRI. But if you look over the lifetimes of younger workers, they're more likely to hit the cap
at some point before they retire. Between 1% and 1.5% of all 401(k) participants ages 26 to 35 would hit a cap of $3
million by age 65, according to EBRI, but if higher rates pushed that cap down to $2.2 million, it would catch between
3.5% and 5.2% of them. Those people lucky enough to have pension plans from their current or previous employers, as
well as 401(k) and IRA accounts, would face a higher likelihood of capping-out. Mitigating Factors - Most who have
reviewed the budget proposal believe that no one would be forced to withdraw funds from a retirement account because
it had gone over due to investment gains. If you went over one year, you wouldn't have to worry about triggering taxes
and early withdrawal penalties to get the funds out.
As the Treasury report states, "If a taxpayer reached the maximum permitted accumulation, no further contributions or
accruals would be permitted, but the taxpayer's account balance could continue to grow with investment earnings and
gains." While a person whose account went over due to investment gains would face no consequences, someone who
continued to make contributions after the cap would. There would likely be a grace period to withdraw the excess funds
from the account to comply with the limit. Absent that, the taxpayer would face income taxes on the excess contribution
and any earnings attributable to it. The biggest problem with the proposal may be its complexity, and the potential
administrative maelstrom of trying to make it work. Every year, investors would have to calculate how much they had in
IRAs, 401(k) accounts, pensions, and other tax-advantaged accounts, and know what that meant in annuity terms. Tax
professionals seem to agree that the proposal raises more questions than answers and from the perspective of the
Service, administration would be cumbersome, if not outright nightmarish in its application. For its complexity, revenue
under the proposal isn't significant.
The Treasury and joint committee are split on their revenue projections, the former having estimated revenue at $9
billion, and the latter $4 billion over a nine-year period. Government spends more than $100 billion on incentives for
Americans to save for retirement, yet it is unclear what it's getting for its money or whether a different method of
promoting retirement savings would work better. Tax expenditures overall -- including the mortgage-interest deduction
and charitable write-offs, among others -- cost the government about $1 trillion a year, with their benefit skewing heavily
toward higher-income taxpayers. According to the Treasury Report, the proposed retirement cap "could reduce the
deficit, make the income-tax system more progressive, and distribute the cost of government more fairly among
taxpayers of various income levels, while still providing substantial tax incentives for reasonable levels of retirement
savings." "Tax incentives have to be looked at in the context of trade-offs," Treasury Secretary Jacob Lew said at a
House Ways and Means Committee hearing in April. "We are encouraging the vast majority of Americans to save as
much as they possibly can." That being said, there is increasing evidence that some of the structure of tax-preferred
retirement savings may not significantly increase savings. Some believe many employers would terminate 401(k) plans
should the measure become law. Another question that financial advisors are asking is whether a retirement-plan cap
would make insurance and annuities -- which are not included in the cap -- more attractive? Many wealthy investors
already use life insurance as part of their strategy to limit taxes and pass assets on to heirs, since death payouts are
typically exempt from federal taxes.
Annuities, meanwhile, are typically funded with after-tax dollars, with the payouts a mix of tax-free return of principal and
earnings taxed at ordinary income-tax rates. The proposed retirement-plan cap -- along with another White House
budget proposal to require anyone (other than a spouse) who inherits retirement plans to liquidate (and pay income tax
on the proceeds) within five years -- could encourage wealthy investors to put more money toward insurance products.
Insurance companies, one might suspect, favor the proposal. Fortunately, the proposal is at a preliminary stage and few
believe it will ultimately become law. Takeaway -- whether you're above the cap, think you might be, or just approaching
it -- is that there's no reason to make any big moves now.
Changing your investment allocations or strategy based on a proposed tax change, especially this early in the process,
with this little clarity, is a fool's game. If you're close to the cutoff, though, you might want to increase your savings in
taxable accounts, so as not to go over in your tax-advantaged accounts. After all, the biggest retirement question is not
whether your savings are in a 401(k) plan, IRA, or taxable account, but whether there's enough there away to maintain
your preferred standard of living you want once you plan or are forced to stop working.
Tax Return Refund Fraud at Epidemic Levels
By Daniel D. Kopman, Esq.
Posted: June 7, 2013
Ronald Williams, President of Talon Executive and Security Services, Costa Mesa, California explains that as tax season
is officially over, and while some taxpayers have already spent their much-awaited refund, others are still scrambling to
pay back Uncle Sam. But a third group of taxpayers found themselves shocked and frustrated this year after discovering
the unthinkable—their tax refund had been stolen. Unfortunately, according to experts, tax return fraud is quite a simple
crime. Perpetrators steal a taxpayer’s Social Security number and then file a tax return either under the original taxpayer’
s name or under a phony name.
They then download the refund onto a debit card designed for people without bank accounts or deposit it into an
account they open and then quickly close. In many cases, the thief is the victim’s trusted tax preparer, who prepares a
false W-2 form. So how do thieves obtain Social Security numbers? Some perform what is referred to as phishing,
fooling unsuspecting people to reveal their personal data over the Internet or phone. Others break into computer
systems at work and obtain secure information. Still others do it the old-fashioned way, stealing wallets and papers
containing personal data. This past February, a former U.S. Postal Service carrier pleaded guilty in one of the largest
tax return fraud cases ever uncovered. Bennie Haynes of Dayton, New Jersey, along with his sidekick Manuel
Rodriguez, filed more than 8,000 fraudulent returns that sought $65 million in refunds, causing the IRS to lose more
than $12 million.
The men used birthdates and Social Security numbers belonging to Puerto Rican citizens to create Form 1040 forms
that falsely reported wages and taxes withheld. They then paid cash bribes to mail carriers to intercept refund checks.
When it comes to tax return theft, no one is immune. One news reporter interviewed an entire police department unit
and learned that nearly every employee had been victimized. Elderly people, students, white-collar workers, teachers,
teens, members of the military, self-employed mothers and even the deceased have all found themselves victims of this
scam. Tax return theft victims do not realize their refund has been stolen until they go to file their return. Upon doing so,
they learn a fraudulent tax return has been filed under their social security number, and the nightmare begins. Each
victim must immediately contact the IRS and wade through a series of procedures to receive their return.
This process can often be quite difficult, as the IRS has to first establish that the person is the true taxpayer and not the
perpetrator. In some cases, perpetrators claim that they are the victim, complicating things even further. Most victims do
not see their return until 180 days later. Experts have several suggestions to help taxpayers avoid tax return theft. They
suggest never filing a return at a Wi-Fi spot, such as a coffee shop; never leaving any confidential information lying
around; not carrying one’s Social Security number in a wallet; checking one’s credit report frequently; and never giving
any personal information over the phone, mail or Internet.
The IRS adds that they will never correspond via email. Lastly, experts stress to never, ever sign a blank tax return.
Though the government has made some headway on this issue, they still have far to go. Over 770,000 taxpayers who
have been victimized now have special protection pin numbers. According to a recent Bloom berg Report, President
Obama’s 2014 budget plan includes a proposal to combat the rise in tax return theft and identity theft. The proposal
includes a $5,000 civil penalty for tax-related ID theft (Is he kidding? Not much of a deterrent.), restricting access to
Social Security death records and allowing employers to avoid putting Social Security numbers on W-2 wage reporting
forms. But is this enough to combat this rapidly growing crime? This year, taxpayers should take measures to become
proactive before they find themselves the next victim of tax return theft. And businesses should take cyber security
matters seriously by protecting their systems before a breach occurs. With heightened awareness and proactive
thinking, we can all help stop this increasingly detrimental crime in its tracks.
Estate Planning Complacency May Be Costly: Administration's 2014 Fiscal Year Budget Proposals.
By Daniel D. Kopman, Esq.
Posted: June 6, 2013
On April 10, 2013, with the release of the Obama Administration's 2014 fiscal year budget proposals, together with the
"General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals," commonly referred to as the
"Green Book," the permanency of the estate, gift and generation-skipping transfer tax law has again been called into
question. There were a few short months of calm following the January 2, 2013 enactment of the American Taxpayer
Relief Act of 2012 (“ATRA”). Now, the Administration makes a number of proposals affecting estate, gift and generation-
skipping transfer taxes, including:
- Restoring the estate, gift and generation-skipping transfer tax rates and exclusion amounts to their 2009 levels
beginning in 2018. The top tax rate would increase to 45% (it is currently 40%). The federal estate and
generation-skipping transfer tax exclusions, which are currently $5.25 million ($5 million indexed annually for
inflation), would be reduced to $3.5 million. The gift tax exclusion, which is currently $5.25 million ($5 million
indexed annually for inflation) would be reduced to $1 million. There would be no indexing of the exclusion for
inflation in any case.
- Portability of the unused exclusion between spouses would remain.
- Implementing a minimum term of ten (10) years for grantor retained annuity trusts ("GRATs"). Imposing a
minimum GRAT term increases the risk of the Grantor failing to survive the term and the possibility of periods of
depreciation offsetting periods of appreciation during the term. There would also be a maximum term equal to the
life expectancy of the annuitant plus ten (10) years. • Eliminating the use of "zeroed-out" GRATs. The GRAT
remainder interest at the time of the initial transfer (the amount of the gift) would be required to have a value of
greater than zero resulting in a taxable gift.
- Coordinating the income tax and transfer tax rules applicable to grantor trusts. This proposal would eliminate the
traditional estate tax benefits associated with installment sales to grantor trusts. If the grantor engages in a sale,
exchange or comparable transaction with a "grantor trust" then the portion of the trust attributable to the property
received by the trust in that transaction (including all retained income therefrom, appreciation thereon and
reinvestments thereof, net of the amount of the consideration received in that transaction) would be subject to
estate tax at the grantor's death. Termination of grantor trust status and distributions from the trust would be
subject to gift tax. Transactions occurring before enactment date would be grand fathered.
- Limiting the duration of allocated generation-skipping transfer tax exemption to 90 years. The generation-skipping
transfer tax exclusion allocated to a trust would terminate on the 90th anniversary of the trust's creation.
Currently, there is no such time limitation and trusts created in jurisdictions that have eliminated the rule against
perpetuities can remain exempt from generation-skipping transfer tax indefinitely.
These proposals illustrate the need to monitor your estate plan. It may be prudent to engage in additional planning at
this time in light of the possible changes discussed above.
Loan Techniques Used in Wealth Preservation Planning
By Daniel D. Kopman, Esq.
Posted: May 23, 2013
Most estate planning techniques for shifting wealth employ one of three strategies, namely gifts, sales techniques and
by loans originated between family members. The concept is driven by classic interest rate arbitrage, more specifically,
by capitalizing on the differential between the minimum interest rate required to be used to avoid imputation of interest
and gifts on the one hand, and the potential higher earnings (rate of return) which the borrower, usually a descendant
of the lender, may earn on the borrowed funds in the market place on the other. The applicable federal rate (“AFR”) is
generally lower than the prevailing market interest rate in commercial transactions. The AFR is based “on outstanding
marketable obligations of the United States.” The short-term, mid-term, and long-term rates under I.R.C. §1274 are
determined based on the preceding two months’ average market yield on marketable Treasury bonds with
corresponding maturity. Just a few examples of possible uses of intra-family loans and notes are: loans to children with
or without significant net worth; non-recourse loans to children or to trusts; Loans to grantor trusts; installment sales to
children or grantor trust for a note; loans between related trusts; loans to an estate; loans to trusts involving life
insurance; and home mortgages for family members.
Tax Land Mines and Other Tax Traps Lurking in Inherited IRA's
By Daniel D. Kopman, Esq.
Posted: May 6, 2013
Inherited IRA's - Tax traps A beneficiary who inherits the of IRA of an individual who has a required distribution for the
year must take any remaining required minimum distribution (RMD). Below is just one permutation in which, by not
following the RMD law, significant tax penalties will almost surely follow. Both Dave and Sue were 75 years old last year
when each took their RMDs for the year. Dave died early in December having designated Sue as beneficiary of his IRA.
Sue rolled the proceeds of Dave's IRA into her IRA in January. So, the issue arose – “What is Sue’s RMD for the year?"
An IRA owner's RMD is typically calculated based on their prior year-end account balance. Sue's prior year-end balance
did not include the amount which she had inherited from Dave. It was still in the IRA in Dave’s name at year end.
Two key questions: (1) Should Sue base her current year RMD on her account balance only?; and (2) While it is too late
for Dave to enjoy the balance of his IRA, what happens to the RMD on Dave’s account? Under most states' laws, assets
that pass through a beneficiary form become the property of the beneficiary at the instant they inherit it and, in that
regard, it matters not whether the beneficiary’s name is in the account title. It belongs to the beneficiary from that
moment on. Therefore, Sue must calculate her RMD for the year on both balances. Beneficiaries must be made aware
of the above rule by their advisers and for too many that knowledge comes only after it is too late and the damage
cannot be undone, because any required RMD not taken is subject to a 50% penalty on the amount not taken.
If Sue takes only the RMD based solely on her IRA balance, and not the combined balance of her IRA and Dave’s
account balance, Sue is surely going to owe a significant penalty on the RMD she did not take. Also, unless the estate
(as opposed to Sue) is the beneficiary, Sue cannot avoid the penalty by simply leaving the IRA in Dave's (the
Decedent's) name and have the estate take the RMD before transferring the account to the beneficiary. IRA rules for
beneficiaries can get very complicated. We recommend you consult us should you have further questions on this or
related IRA distribution topics.
(09-26-2014 - Note to DDK: Update to discuss changes in creditor protection laws for inherited IRA's and future of tax
Annuityville Horror Stories
By Daniel D. Kopman, Esq.
Posted: April 30, 2013
Stephen King would be terrified by some of frightening annuity happenings that unfortunately are now commonplace.
Annuities can be great transfer of risk strategies when properly positioned in a portfolio and there are many good
agents out there trying to match up annuity guarantees with specific portfolio goals. That said, we all continue to learn of
nightmarish stories of unsuitably sold annuities that you need to know about to avoid these potential sales traps.
Annuityville horror story No. 1 "$53,000 in annual fees." - Recently, a nice man (let's call him Herman Muenster) called
his financial adviser to take an objective look at a load variable annuity he purchased a few years ago. For the right
client, sales of certain no-load variable annuities that are 100% liquid day one and provide efficient tax-deferred growth.
Herman had worked hard for 35 years in a factory, has been married for over three decades, and has two grown
children. Over that 35 years he had accumulated over $1.5 million in his 401(k), and that was all the money that he had
for retirement. As he was driving home one day, he was listening to a radio show that he trusted so he called and was
referred to a local adviser to discuss his upcoming retirement.
Herman told the adviser that he wanted to turn on a lifetime income stream in five years because he was going to take
another job in the interim. He also wanted to set the payments up to cover both his and his wife's life, and he didn't want
to lose any money to market volatility. Certainly, clear requests. Unfortunately, what he was sold was a fully-loaded
variable annuity with 3.9% in annual fees, consisting of a Mortality and Expense fee of 1.25%, an Income Rider fee of
0.85%, a Death Benefit Rider fee of 0.85%, and Mutual Fund Expense of 0.95%. Herman was not aware of any of these
fees until his adviser went through his prospectus and showed the specific breakdown of annual charges. In addition,
the adviser put 100% of the money into just one mutual fund, even though there were hundreds of choices -- and
charged an additional 1.10% management fee to oversee it.
The average annual fee on a load variable annuity (including riders) is typically around 3%. But with the "oversight" fee
added to the 3.9% policy charge, Herman's annual fees on the total asset amount was 5%, which adds up to a whopping
$53,000 per year. The income rider, which is an attached benefit used for future income, was added for lifetime income
guarantees. That would have been OK except that the income rider was not set up to pay a joint lifetime income stream
with his wife and couldn't be turned on for 10 years (remember that Herman needed income to start in five years). To
surrender the policy in full would cost Herman over $80,000. Because of the high surrender charges, there is really
nothing he can do except take out 10% of his money via the penalty free withdrawal clause, not the happiest of options.
You can't make this kind of horror up.
Annuityville horror story No. 2 "Paying surrender charges because the bonus covers it." - Advisers hear this one on a
weekly basis, so the story is the same every time and only the names change. Agents love to transfer one annuity to
another annuity, and sometimes inappropriately use the "upfront bonus" as an excuse to "cover" for any surrender
charges. This is called "twisting" or "churning" in the annuity regulatory world, and in some states it can be a third-
degree felony. Most carriers try to prevent these types of transfers within the application paperwork by requiring a side-
by-side comparison of the old annuity and the annuity that it is going to.
The bottom line is that the math has to work in the client's favor, not the agent's. Make sure you get a copy of the
application comparison page from the agent. Annuityville lesson: In most cases, it doesn't make sense to take surrender
charges from one annuity and have an upfront bonus "cover" for that amount to move to another annuity. Do the math
because it normally doesn't work in your favor. Unfortunately, millions of dollars of annuity nightmares are being sold on
the Web every day. Normally, you sign up after watching a video and magically ... you have a bright eyed agent in your
home usually talking about the best indexed annuity ever. The agent typically can't stop saying the word "hybrid" or
using the phrase "reasonable rate of return" (whatever that means). Unless the regulatory bodies step in and stop these
annuity Web promoters, there will soon be many new horror stories to be shared. Until then, caveat emptor.
A Whole Lot of Whailin' Going On Among Heirs of Bob Marley
By Daniel D. Kopman, Esq.
Posted: April 20, 2013
Even the ravages of cancer could not convince reggae czar Bob Marley to write a will. Creating a last will and testament
wasn't an option because his Rastafarian faith prohibited a belief in death. Marley's concern for his wife and children
drove him to ask his attorney about the consequences of dying without a will. He was told, essentially, that "every thing's
gonna be all right." Not so. Bitter legal battles and family feuds erupted after the reggae star's death on May 11, 1981.
Under Jamaican succession law, Marley's widow, Rita, was entitled to 10% of her husband's $30 million estate and held
a life estate in another 45%. Marley's 11 children (4 by his wife and 8 by other women) were entitled to equal shares in
the other 45% as well as a remainder interest in Rita's life estate. Simple, right?
Predictably, this clear cut law was muddled by personal relationships, attorneys, and accountants. The family was
immediately concerned after learning the absence of a will meant they had no rights to Bob's name or likeness. In
response, Rita borrowed money and sued the estate. Millions of dollars later, she was rewarded with the decision that
the family was entitled to Marley's name and likeness (Right of Publicity).
On a related note, Marley's widow and his mother, Cedella Booker, went their separate ways. The two have since
reconciled, but at one point, Booker asserted Rita's heart was black. Outside of the family, Marley's long-term band
mate, Aston "Family Man" Barrett, a man with 58 children of his own, sought royalties from his time with Marley's Wailers.
The estate's most famous brush with the courts came in 1986. The estate administrator, Mutual Security Merchant Bank
and Trust Company, sued Marley's attorney and accountant. Mutual Security accused Marley's advisors (and Rita) of
diverting estate assets and royalties into their own bank accounts via international corporations. Rita was accused of
forging Marley's signature on documents that supposedly transferred some of his interests to her before he died, which
excluded them from estate property.
All of the legal wrangling hasn't tainted the mystique surrounding Bob Marley. As his first greatest hits album proves, he
is a legend. His popularity grows as each new generation meets him through his music. Clothing and accessories
abound on the market. His songs are continually featured in films and commercials. Forbes Magazine estimated Marley's
posthumous earnings at $9 million, and that is just between September 2002 and September 2003. That's not bad for
someone who has been dead for over twenty years. His music catalog alone is worth about $100. Certainly a lot of
clams and Red Stripe, but imagine what the Marley fortune would be if it hadn't been for all the legal fees. No will, no
cry? I think Not.
Significant Estate Tax Planning Benefits in Split-Dollar Universal Life
By Daniel D. Kopman, Esq.
Posted: April 16, 2013
Permanent Life Insurance - High Octane Non-Taxable Investment - In an era of higher marginal income tax rates on
individuals, permanent life insurance policies such as universal life (U/L) policies are even more attractive. Unlike
investing solely in marketable securities which incur a heavy on-going tax burden, the growth in value of a U/L policy
(amount by which the death benefit exceeds the premiums paid) is received income tax free. That is one reason why life
insurance is one of the few remaining tax planning/tax sheltered investment bastions available in the United States.
Additionally, because growth in value of permanent policies - except in the case of certain variable life policies - is
neither positively nor negatively correlated with movement in the stock market, it is an excellent choice as a high ROI
alternative investment within an investor's asset allocation model. The tax benefits of properly structured life insurance
planning in the estate planning context are significant. Because of its tax favored status, life insurance when integrated
with other estate planning tools is unsurpassed for creating highly desired estate tax leverage. Strategies frequently
utilize what are referred to as ILIT and SLAT forms of irrevocable trusts in which gifts qualifying for the estate tax annual
exclusion and even those that do not, are used to procure insurance on the grantor, usually the parents or
grandparents of the beneficiaries of the trust.
Additional Leverage Using Split Dollar Arrangements - In the most simplistic cases, the trustee of the above-described
trusts purchases an insurance policy with the grantor as the insured and pays the premiums either in an up-front (single
premium) payment or is commonly the case or, instead, pays annualized premiums. However, in a split-dollar
arrangement, the grantor makes a portion of the premium payment(s), which allows the trust to acquire a policy with an
even larger death benefit than it would otherwise be able to do in the absence of the financial leverage under a split
dollar arrangement. Recall that because the policy proceeds will be received by the trust and, ultimately, will be
distributed to the beneficiaries on an income and estate tax-free basis, the tax leverage afforded by split dollar
arrangements can be significant. Without getting overly technical, in some arrangements the grantor's estate will include
the reimbursement from the death benefits to the extent of the greater the policy premiums paid by the grantor or the
cash value which has accumulated in the policy. In most instances, the economic impact of such inclusion will be
significantly less costly than the benefit inuring to beneficiaries in the form of a tax-free inheritance. With proper
planning, such benefit can be levered even further to avoid the federal generation skipping transfer (GST) tax which
might otherwise be incurred in devolving an inheritance across more than one generation.
Exit or Rollout Plan may be Necessary - In some but not all instances of split dollar planning, the grantor may be saddled
with paying taxes on the economic benefit associated with the arrangement, roughly equal to what would be annual
renewal term premium on the life insurance policy, even after no further premium payments are due under the insurance
contract. In circumstances where this occurs, the benefit of such on-going split dollar agreement is diminished or, worse,
eliminated by the phantom term premium imputed to the grantor, which may grow exponentially with the grantor's
increasing age. When that occurs, a rollout (also known as an exit plan) should be considered and, if appropriate,
constructed to eliminate the adverse tax consequences. While there are many avenues to accomplish the roll out, one
which I have used involves using the value of the remainder interest in a separate Grantor Retained Annuity Trust
(GRAT) to pay prospective policy premiums, thereby eliminating the obligation of grantor to make them. Although truly
understanding the mechanics GRATs requires an investment of time, in its most simplistic sense, the grantor has
established a separate irrevocable trust into which he or she retains the right to receive an annuitized income stream
from the trust usually for a specified term after which, assuming the grantor survives the term, the remainder passes on
an after-estate tax basis to grantor's beneficiaries, who are also the beneficiaries of the above-described insurance
trust. With historically low IRS interest rates mandated for discounting the retained annuity stream, the taxable value of
the gift of the remainder interest in the GRAT will be significantly minimized. Under the GRAT exit strategy, the trustee of
the ILIT or SLAT trust uses the funds received from the GRAT remainder interest to pay life insurance premiums which
otherwise would have been the on-going obligation of grantor, and the rollout has been accomplished with policy death
benefits remaining attractively tax free.
Now May Be Time to Consider Real Estate Investment Trusts
By Daniel D. Kopman, Esq.
Posted: March 7, 2013
Investors ran to real estate investment trusts in 2012, attracted by evidence of a housing rebound combined with
historically low yields on other traditional investment products. REIT's, many of which trade like stocks on major
exchanges and invest in commercial or residential property, mortgages or a combination thereof, delivered in spades. A
BANNER YEAR Through mid-October 2012, US Equity REITs returned 19.4%, exceeding the 17.9% gain in the S&P 500
Index, according to the National Association of Real Estate Investment Trusts. Global real estate funds also rose in
2012, up 25.6% through early November making them the best-performing sector according to Morningstar. REITs also
provided results for investors thirsting for yield. On average, US equity REIT dividend yields were 3.2% through the first
three quarters of 2012, well above the 1.8% and 2% respective yields for 10-year Treasury notes and the S&P 500.
With returns like that, it's not surprising that REIT exchange-traded funds (ETFs) had net inflows of almost $7 billion
through October, according to Morningstar. NO GUARANTEES It's important to remember that past performance is
never an indicator of future results (i.e., past is not prologue). Just because REITs had a strong showing through most
of 2012, they won't necessarily continue to outpace broader indexes. Also, there's no certainty that housing will continue
to rebound, despite several promising signs. Mortgage rates, however, remain near historic lows and there's an
imbalance of supply and demand emerging in a growing number of local markets, auguring well for a continued housing
There will likely be bumps in the housing recovery road. But it appears that rates will stay near their historic lows,
allowing more time for buyers who may have been delaying a purchase to act. NOT ALL REITs ARE ALIKE REITs come
in many flavors. While some are concentrated in specific local markets, others are widely diversified across regions or
even countries. Some specialize in certain property types, such as office buildings, shopping malls, apartments,
warehouses or hotels, while others invest in a combination of properties. And each category of REIT performs
differently. In 2012, REITs based on retail properties did particularly well. The group posted average total returns of
more than 23.6% through the first 11 months of the year, according to NAREIT. Timber REITs, which have more than
50% of their asset value in property involved in forestry products, also shined, gaining more than 33% during that time
period. REITs that specialize in lodging and resorts lagged, with a total return of 5.5%; residential REITs trailed the
group with a total return of 2.7% through the end of November. Mortgage REITs, which invest in pools of mortgages,
also known as "mortgage-backed securities," were among the stronger performers through most of 2012, rising 18.9%
and 39.2%, respectively, for home and commercial mortgages; according to NAREIT. But these REITs also were among
the most volatile-they tumbled 6% in one week in October alone. Mortgage REITs can be challenged by declines in
interest rates, which spur mortgage refinancing. When a mortgage refinances, the REIT usually needs to reinvest
assets, typically at a lower rate.
DIVERSIFY, DIVERSIFY, DIVERSIFY Because all REITs are not created equal and perform differently, investors need to
be especially mindful of diversification. If you are interested in managing a portfolio of individual REITs, diversification is
crucial and should be part of a broader investment strategy. Holding at least five to 10 individual names may be
necessary in order to achieve adequate diversification. Investors should diversify across several different property types
and also by geographic region within the REIT portion of a more broadly diversified portfolio. Investors can visit
company websites to learn more about REIT property investments. The bottom line for investors is that while REITs on
the whole have performed well during the prior three years, there's no certainty that out performance will continue. If you
want to invest in property via publicly traded companies, remember to spread your investments over several REITs. It is
also important to keep in mind the tax consequences of REITs. These investments must distribute 90% of their income
to shareholders as dividends and those dividends are taxed at the shareholder's marginal income tax rate.
View Disputes Among Owners of Luxury Ocean View Properties On the Rise
By Daniel D. Kopman, Esq.
Posted: February 18, 2013
As a law and financial concern working with high net worth clients, Kopman Law Advisors is often called upon to advise
clients on matters which are unique to such demographic, not the least of which involves disputes over view obstruction.
View disputes among neighbors along the Southern California coastline are a rapidly growing phenomenon. There are
several reasons for the prevalence of disputes, the most prolific among them being that coastal view property is a
scarce resource. To avail themselves of spectacular ocean and white water vistas, people are paying enormous sums
and, in the course of doing so are becoming more clustered into existing neighborhoods while already over-built hillsides
are spawning even more construction, as modern construction techniques make it possible to build where no one has
dared build before.
Moreover, peoples' willingness to pay multi-millions of dollars for ocean view homes makes them all the more aggressive
and vigilant when they perceive a vista transgression has occurred, to wit, they are willing to commit big bucks to
prosecuting or defending the cause. New construction, structural modification, boundary fencing, satellite dishes, solar
panels and landscaping are causes of growing tension among many homeowners. Most coastal cities and common
community development associations do provide guidance and authoritative promulgations for restrictions on new
construction and architectural enhancements. Many architectural rules, while principally aesthetic in governance,
purport to spill over into view regulation viz-a-vis building set back restrictions and the like. At some point structural
restrictions meld into the arena of landscaping and, ultimately, become de facto view restrictions.
More spurious are guidelines for trees, hedges, awnings and other appurtenances which may intrude upon another
homeowner's space and view and clearly do not fall under the ambit of community aesthetics. Perhaps the area where
the least guidance and authority exist is in regard to trees, hedges and similar hard scape components. Any analysis
starts with the premise that California affords property owners no inherent legal right to light, air or view. Some beach
cities, Laguna Beach for example, have imposed ordinances seeking to impose some order and control over plants and
trees which may block neighboring views. The City has a formalized grievance procedure which ferrets out many
disputes. Such procedure is consistent with experience which suggests that a majority of view disputes are resolved
informally without resort to government intervention. Some argue that the rules do not go far enough and thereby
undercut the effectiveness of pre-litigation dispute resolution.
Municipalities in some instances, while providing no express authority over trees and shrubs, allows homeowners to
argue that a hedge-row or similar line of trees is the functional equivalency of a fence. Such argument allows disputing
owners to avail themselves of the same arguments over plants and trees as could be made in the case of an offending
wall or fence. Single trees present a more difficult challenge. Homeowner associations in many instances provide the
best control and remedies in the case of view disputes. The covenants, codes and restrictions, or "CC&R's," are
contractual agreements among founding homeowners and an association providing stipulated restrictions on
construction, views, paint color, architectural themes and really any other lawful subject matter. Restrictions on views,
like all restrictions, must be reasonable and are said to "touch and concern" the land and therefore run with the land
making them binding on successors who purchase property within a particular association. Under state law, rules which
seek to impose restrictions on views must be articulated with sufficient clarity. Clarity in rule promulgation ensures that
standards are not vague so as to allow for arbitrary and capricious enforcement. I recently successfully handled an
egregious case involving capricious enforcement of view restrictions. An individual recently purchased a Newport Beach
residence immediately adjacent to my client and began bullying neighbors on all sides of her with nonsensical view
The Bully began to write threatening letters to my client demanding that my client remove her awnings which had been in
place for more than 10 years prior to the new homeowner moving into the neighborhood. The Bully then demanded that
the board of directors of the neighborhood's homeowners association mandate that my client remove the long-standing
awnings or pay financial penalties for as long as they remained in place. By way of background, some years prior the
Board mandated - without any apparent authority - that my client remove the awnings. Notwithstanding, non-
enforceability of the prior order on its face, enforcement was separately time-barred under the applicable five-year
statute of limitations as the Board had not timely taken action to enforce any right it may have had. More significantly,
the Board has continuously asserted authority over view restrictions, leaning upon rule promulgated by a sub-committee
it called the "view preservation committee" made up of several members of the Association's Board at Large.
Importantly, neither the view preservation committee, nor the rules it had promulgated and sought to enforce were
authorized by association members under the Association's CC&R's. When I raised such defense, which was backed by
my client's wiliness to litigate the matter if necessary, the Board reversed its position and a prospective hearing was
summarily canceled. As the above case illustrates, people seeking to preserve views should familiarize themselves with
city and county ordinances and rules of any governing community association. Separately negotiated private written
agreements, including easements, good neighborly relations and common courtesy can go a long way toward
preventing and resolving view issues. Written agreements, like tall fences, as the saying goes, makes for good
neighbors. Bear in mind that the California Coastal Commission may also have a say in what trees may be planted or
destroyed along the coastal areas within its jurisdiction.
2012 Tax Act Individual Income Tax, Business Income Tax and Transfer Tax Planning Considerations
By Daniel D. Kopman, Esq.
Posted: February 5, 2013
Tax Act Provisions for Individuals
On New Year's Day 2013, Congress passed a far-reaching new law intended to avert the so-called fiscal cliff. The
American Taxpayer Relief Act, signed into law by President Obama on January 2, 2013, impacts every taxpayer. Not
only does the new law make permanent reduced income tax rates for most taxpayers, it extends either permanently or
temporarily a host of other tax incentives. At the same time, the new law creates valuable tax planning opportunities. Not
all provisions, however, are good for all taxpayers. Those individuals with income above $400,000 ($450,000 for
families) are now subject to a new top income tax rate of 39.6 percent and a new capital gains maximum rate of 20
percent and, all taxpayers will be taxed two percent more in 2013 than in 2012 on wages and self-employment income
up to the Social Security employment tax wage base ($113,700).
Our office can help you plan a tax strategy that reflects the important changes in the American Taxpayer Relief Act. Tax
Rates Unless Congress acted, taxpayers in all incomes groups were looking at a tax hike in 2013 because of the
expiration of the Bush-era tax cuts and the 2012 payroll tax holiday. The long-time bracket structure of 10, 15, 25, 28,
33, and 35 percent was scheduled to revert to 15, 28, 31, 36 and 39.6 percent after 2012. On top of that, the payroll tax
holiday reduced the employee-share of Social Security taxes (with a comparable benefit for self-employed individuals)
for two years: 2011 and 2012. The American Taxpayer Relief Act preserves and permanently extends the Bush era
income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with
taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these
thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds
will be adjusted for inflation after 2013. The new law, however, does not extend the payroll tax holiday.
Effective January 1, 2013, the employee-share of Social Security increased from 4.2 percent to 6.2 percent (its rate
before enactment of the payroll tax holiday). The net result is that all individuals who receive wages (and self-employed
individuals) will see less take home pay in 2013. Capital Gains Effective January 1, 2013, the maximum tax rate on
qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose incomes exceed the thresholds set
for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all
other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains
and dividends to the extent income falls below the top of the 15- percent tax bracket. Alternative Minimum Tax The
alternative minimum tax (AMT) was put in place more than 40 years ago to ensure that very wealthy individuals did not
Due to many factors, including the fact that the AMT was not indexed for inflation, the AMT has encroached on middle-
income taxpayers. In recent years, Congress routinely "patched" the AMT by increasing the exemption amounts and
making other relief available. These patches were just that: temporary measures. The American Taxpayer Relief Act
permanently patches the AMT by increasing the exemption amounts and indexing them for inflation. Retirement Savings
The American Taxpayer Relief Act makes a valuable change to the treatment of retirement savings and opens up an
important planning opportunity. Generally, participants with 40l(k) plans and similar plans have been allowed to roll over
fund to designated Roth accounts in the same plan subject to certain qualifying events or age restrictions. The
American Taxpayer Relief Act lifts most restrictions, and now allows participants in 401(k) plans with in-plan Roth
conversion features to make transfers to a Roth account at anytime. Congress made this change because conversion is
a taxable event and will raise revenue. Estate Tax Federal transfer taxes (estate, gift and generation-skipping transfer
(GST) taxes) seem to have been in a constant state of flux in recent years.
The American Tax Relief Act aims to provide some certainty. Effective January 1, 2013, the maximum estate, gift and
GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The exclusion amount for
estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST
exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent
portability and some enhancements made in previous tax laws. Tax Credits and Deductions Like the Bush-era income
tax cuts, many popular tax credits and deductions were scheduled to expire after 2012 (in some cases, they expired
after 2011). The American Taxpayer Relief Act makes some of these incentives permanent and extends others. One of
the most widely used tax credits, the $1,000 child tax credit, is made permanent. If Congress had not acted, the $1,000
child tax credit would have decreased to $500 per qualifying child for 2013 and beyond. The $1,000 amount is not,
however, indexed for inflation.
Other popular tax credits and deductions for individuals made permanent or extended by the new law include: •
Enhanced adoption credit/exclusion (permanent) • Enhanced child and dependent care credit (permanent) • Enhanced
student loan interest deduction (permanent) • American Opportunity Tax Credit (through 2017) • Higher education
tuition deduction (through 2013) • IRA distributions to charitable organizations (through 2013) • Transit benefits parity
(through 2013) • Cancellation of indebtedness on principal residence (through 2013) • Code Sec. 25C residential
energy efficient property credit (through 2013) • Teachers' classroom expense deduction (through 2013) The American
Taxpayer Relief Act also revives the Pease limitation and personal exemption phase out (PEP) for higher-income
taxpayers after 2012, but not at their former levels. Generally, individuals with incomes over $250,000 and married
couples with incomes over $300,000 will be affected. Planning Opportunities The American Taxpayer Relief Act opens
tax planning opportunities because it impacts so many tax rules, everything from income rates to retirement planning.
Congress intended to make permanent many of the changes, which creates a climate for tax planning unlike the recent
past where uncertainty was the rule and not the exception.
Tax Act Provisions for Businesses
As 2012 ended, the national debate focused on the expiration of the Bush-era tax cuts and the so-called fiscal cliff. On
January 1, 2013, Congress passed, and President Obama signed the next day, the American Taxpayer Relief Act. The
new law includes some valuable business tax incentives. Many of these business tax incentives are temporary so
taxpayers have a limited window in which to maximize their potential tax savings.
Tax Rates - Depending on how a business activity is structured, it may be taxed as corporation or its owners may pay
taxes at the individual rates. The American Taxpayer Relief Act permanently extends the Bush-era income tax cuts
except for single individuals with taxable income above $400,000; married couples filing Joint returns with taxable income
above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be
taxed at a 39.6- percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds, which will be
adjusted for inflation after 2013, are also used to determine the point at which the maximum tax rate on capital gains and
dividends for an individual rises from 15 percent to 20 percent.
Bonus Depreciation - Bonus depreciation is one of the most important tax benefits available to businesses, large or
small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off
100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available, but was
reduced to 50 percent. The American Taxpayer Relief Act extends 50- percent bonus depreciation through 2013
(through 2014, in the case of certain period production property and transportation property). The American Taxpayer
Relief Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim
additional research or minimum tax credits in lieu of claiming depreciation for qualified property. While not quite as
attractive as 100-percent bonus depreciation, 50-percent bonus depreciation is valuable. For example, a $100,000
piece of equipment with a five-year MACRS life would qualify for a $60,000 write-off: $50,000 in bonus depreciation plus
20 percent of the remaining $50,000 in basis as "regular" depreciation for the first year. Bonus depreciation also relates
to the vehicle depreciation dollar limits under, Code Sec. 280F. This provision imposes dollar limitations on the
depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business
and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck
placed in service in 2013 is increased by $8,000. Bonus depreciation, unlike Code Sec. 179 expensing (discussed
below), is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179
expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100
Expensing - The American Taxpayer Relief Act enhances or extends several expensing provisions. These include Code
Sec. 179 small business expensing, 15-year recovery period for qualified leasehold and retail improvements and
restaurant property, special expensing rules for film and television productions, and a seven-year recovery for
motorsports complexes. Code Sec. 179 expensing. In recent years, Congress has repeatedly increased dollar and
investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and
2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. The American
Taxpayer Relief Act boosts the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2
million) and adjusts those amounts for inflation. Keep in mind that the increase is temporary. The Code Sec. 179 dollar
and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively,
after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec.
179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the American
Taxpayer Relief Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property, as
well as qualified restaurant property, as eligible for Code Sec. 179 expensing.
Leasehold, retail and restaurant property - The American Taxpayer Relief Act extends, for 2012 and 2013, the special
treatment of qualified leasehold and retail improvement property and qualified restaurant property as eligible for a 15-
year recovery period. Otherwise, this property generally is depreciated over a 39-year recovery period. To take
advantage of this enhanced expensing, the qualified property must be placed in service before January 1, 2014. Film
and television. A special expensing rule allows taxpayers to elect to deduct certain costs of a qualified film or television
production in the year the costs are paid or incurred. The American Taxpayer Relief Act extends this rule through 2013.
Motorsports property. Qualified motorsports complexes may be eligible for a seven-year straight line cost recovery
period. The American Taxpayer Relief Act extends this treatment through 2013.
Work Opportunity Tax Credit - The WOTC expired after 2011 with an exception for employers that hire qualified
veterans. The American Taxpayer Relief Act extends the WOTC (including the special rules for veterans) through 2013.
Each new employee hired from a targeted group generally entitles an employer to a credit equal to 40 percent of first-
year wages, up to $6,000.
Research Tax Credit and Other Incentives - The American Taxpayer Relief Act extends the Code Sec. 41 research tax
credit through 2013. The credit had expired after 2011. The new law, however, does not make the credit permanent, as
had been proposed by President Obama and some lawmakers. Along with the research tax credit, the American
Taxpayer Relief Act also revives through 2013 many other expired incentives, including:
- Employer wage credit for activated military reservists • Reduced recognition period for S corporation built-in gains
- Indian employment credit and accelerated depreciation for business property on Indian reservations
- Code Sec. 45 production tax credit for renewable energy
- Credits for biodiesel and ethanol
- Incentives for manufacturers of energy-efficient new homes and appliances
- Railroad track maintenance credit
- Mine rescue team training credit.
Planning Opportunities Unlike many of the individual incentives in the American Taxpayer Relief Act, many of the
business tax benefits are not made permanent. As a result, planning to maximize tax savings under these extended
incentives takes on a new urgency.
Transfer Tax Provisions of Tax Act
The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) permanently extends and modifies changes made
to the law by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). The 2012 Taxpayer
Relief Act permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted
$5 million exclusion for estates of decedents dying after December 31, 2012; and a 40-percent tax rate and a unified
estate and gift tax exclusion of $5 million, also adjusted for inflation, for gifts made after 2012. The generation-skipping
transfer (GST) tax rate, which is tied to the maximum estate tax rate, is also 40 percent. In addition, the 2012 Taxpayer
Relief Act extends the deduction for state death taxes, and a number of provisions affecting qualified conservation
easements, qualified family-owned business interests, the installment payment of estate tax for closely-held businesses,
and repeal of the five-percent surtax on estates larger than $10 million.
Also, the portability between spouses is made permanent. Summary of Major Changes to Transfer Taxes in 2013
Resulting from the Extension and Modification of EGTRRA and the 2010 Tax Relief Act: • Maximum estate, gift, and GST
tax rate is 40 percent. • Five-percent surtax on large estates and gifts in excess of $10 million up to $17,184,000 will not
be imposed on the estates of decedents dying or gifts made in 2013 or later. • Applicable exclusion amount for estate
and gift taxes is $5 million (adjusted for inflation to $5,120,000 in 2012). • Exemption amount for CST tax is $5 million
(adjusted for inflation to $5,120,000 in 2012). • State death tax credit is permanently repealed and the state death tax
deduction is extended. • Qualified family-owned business interest deduction is permanently repealed. • Modifications to
the exclusion for qualified conservation easements are permanently extended. • Portability of the deceased spousal
unused exclusion amount for estate and gift tax purposes is made permanent. Portability allows the estate of a decedent
who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent's unused
exclusion to the surviving spouse's own transfers during life and at death. If Congress had not acted on the sunset
provisions, effective January 1, 2013, the maximum federal estate tax rate was scheduled to revert to 55 percent with an
applicable exclusion amount of $1 million (not indexed for inflation). The 2012 Taxpayer Relief Act brings some certainty
to the Tax Code related to transfer taxes that has been controversial over the last few years.
Attorneys Should Check in With Your Credit Card Company to Avoid IRS Penalty
By Daniel D. Kopman, Esq.
Posted: January 3, 2013
Attorneys who accept credit card payments need to be aware of a change in the tax law change or face serious
consequences. Beginning this month, Section 6050w of the IRS tax code requires payment processors to report all
settled payment card transactions. The purpose is to improve tax compliance by businesses that accept credit cards.
But here’s the catch for attorneys. If there’s a mismatch between the lawyer or law firm’s tax identification name and
number and the information on file with the processor, a 28-percent withholding penalty kicks in. That means that the
IRS will pull from the account 28 percent of the attorney’s gross credit card sales for 2012. The law does not distinguish
between credit card deposits made to a trust or IOLTA bank account and an attorney’s operating account. For attorneys
who have mismatched information, a 28-percent penalty could cause an overdraft in their IOLTA account, resulting in an
ethical violation. Attorneys should check with their credit card processor to confirm that the tax ID name and number on
Estate Planning For Couples Using Spousal Lifetime Access trusts (SLATS)
By Daniel D. Kopman, Esq.
Posted: November 19, 2012
Estate Planning for Couples Using SLAT Trusts</strong> Married couples looking for an alternative way to use their gift-
tax exemption without limiting their combined cash flow should take a closer look at what is known by estate planners as
Spousal Lifetime Access Trusts (SLAT's). SLAT's are irrevocable trusts settled by married persons seeking to benefit
their spouses. Typically, the spouse afforded a life estate interest, with further retention in trust of the principal for the
benefit of the couple's children or more remote issue. Only separate property of the grantor may be used to fund the
SLAT, as this avoids inclusion of the assets of the SLAT in the gross estate of the spouse/beneficiary under Internal
Revenue Code Section 2036. In a community property state, the community will first be divided into equal shares of
separate property. The grantor then transfers his or her share of the separate property to the SLAT. In order to avoid a
challenge to the trust in grounds the division of community property into separate interests is illusory, the non-grantor
spouse must maintain the separate property character of their share and avoid re-transmutation to community property
through commingling or other avenues.
Making sure that the grantor spouse does not serve as trustee of the trust settled by such grantor should preclude
inclusion of the SLAT assets in the grantor's gross estate under IRC Section 2036. The grantor's spouse may serve as
trustee if such spouse's powers of distribution are limited by an ascertainable standard. Estate planners often
recommend that an independent third party serve as trustee or at least as co-trustee. Also, the SLAT must prohibit
distributions to the grantor's spouse in discharge of the grantor's legal support obligation. Lets' consider a couple who
may be ideal SLAT candidates. The couple's combined estate is significant. They understand that using the gift-tax
exemptions by transferring income producing real estate to irrevocable trusts for the children would be a prudent estate
planning method. They are, however, reluctant to give up the income the property generates out of concern that they
might need access to such capital later. They could achieve similar estate tax benefits with access to cash if the
husband were to establish a SLAT for the wife, with remainder passing to the children and grandchildren. The SLAT
could be custom structured in a number of ways including a "family pot" in which distributions may be made to the wife,
children, and grandchildren in the discretion of the trustee.
As noted above, the SLAT must prohibit distributions in discharge of the husband's legal obligation to support any
beneficiary. Ideally, real property transferred to the SLAT would be undivided interests property or non-voting, non-
controlling interest in a business entity owning the real property. Such forms of transfer would reflect valuation
adjustments for lack of marketability and control. With a properly structured trust and timely filed gift-tax return, the
husband would allocate his generation-skipping transfer tax exemption to the transfer. The SLAT would provide multiple
generations of beneficiaries protection from creditors, ex-spouses, and bankruptcy. Spouses sometimes create SLATS,
each naming the other as lifetime beneficiary. Such approach can provide significant estate planning benefits especially
where there is greater uncertainty as to which spouse may outlive the other. When doing so, however, spouses run the
risk that the IRS will seek to challenge the validity of the trusts/inter-spousal gifts under the "reciprocal trust doctrine." In
order to counter and mitigate the risk of a successful potential attack by the Service, care must be exercised in
structuring the administrative and/or distributive provisions of the trusts to create material differences in their terms
when comparing one trust against the other.
By doing so, it is less likely that the Service would ultimately prevail by establishing the Trusts, in substance, each
cancel the other out. In appropriate circumstances and properly structured, SLAT's are powerful estate planning tools,
reducing estate taxes while at the same time providing liquidity for a surviving spouse. Funding these trusts with
permanent life insurance provides the additional benefit of growth on an income tax free basis.
Would Doris Duke's Estate Have Been "Duked Out" Differently after Beckwith v. Dahl
By Daniel D. Kopman, Esq.
Posted: June 25, 2012
I recall some ten or so years ago, specifically on January 22, 2002, reading an article in the Wall Street Journal about a
battle ensuing over the estate of tobacco heiress, Doris Duke. That article spotlighted a rift among the states over
whether the beneficiaries of an estate have the right to sue an attorney for malpractice over an alleged mistake in
drafting a will. By way of background, philanthropist-legatee Duke died in 1993 at the age of 80. After the core of her
estate was settled, a bi-coastal race to the courthouse ensued when the Doris Duke Charitable Foundation (DDCF) filed
an action in California alleging that Duke's attorney, then constituted as Katten Muchin Zavis, goofed in drafting a clause
in her will, the result of which was some $5.8 million passing to beneficiaries other than to DDCF, among other damages.
But that was not before Katten filed a suit in New York seeking to head-off the Foundation's case at the pass. The
venue race was motivated by the fact that at the time, New York, Texas and a mere handful of other states stipulated
that the only person who can pursue such a suit is the deceased client. That would likely have ended it for DDCF, i.e.,
as in Dickens, Bleak House, "Jarndyce & Jarndyce is no more." Conversely, California, Hawaii, Florida and a number of
other states allow claims by beneficiaries who think the lawyer's mistake has financially deprived them of their rightful
inheritance. The concept as it applies in California and in similar jurisdictions is an extension of third party beneficiary
liability under the law of contracts. While, the outcome of that rift has not been easy to discern from a simple web
search, it is likely that the recent California case of Beckwith v. Dahl decided May 3, 2012 would have made California
an even more welcome jurisdiction not only for disgruntled beneficiaries of Duke claiming to have received a smaller
slice of the estate as a result of professional negligence, but even putative beneficiaries slated to receive "bupkes"
under the negligently-crafted will. With the Dahl decision (Fourth Appellate District; Division Three; GO44479), the Court
gave birth to a new tort magnificently entitled "Intentional Interference with Expected Inheritance" or "IIEI" in usual short-
Dahl shows an ever increasing interest by Courts in the State of California to hear the outlier cases of inheritance
deprivation. The Court outlined the 5 discrete prima facie pleading and proof elements of the new tort, which tort by the
rationale of the court appears to be a somewhat illogical outgrowth of the business tort intentional interference with past,
current or prospective business advantage. Who benefits from the new IIEI tort? Any individual or entity claiming to have
been wrongly deprived of a reasonably expected inheritance as a result of the wrongful interference by a third party
(including an attorney, accountant, etc.) is a potential claimant. Unmarried couples, same-sex couples, third party
caregivers and charitable organizations (like the Duke Foundation) are all examples of who may bring such an action in
California. Revisiting the Duke case, let's consider how the Dahl decision might enhance California's appeal as the
ultimate dream venue of choice - personal and subject matter jurisdiction notwithstanding.
In such case, a California claimant might allege IIED as a companion tort to his/her/ its malpractice action to enhance
litigation posture. Also, by its own logic, the decision purports to expand the scope of would-be plaintiffs to include those
not disclosed anywhere in the estate planning document of the client, the attorney's file or indeed those who are not
clearly related to or are the natural objects of testator's bounty. On a related note, it is premature to predict how the new
IIEI tort will ultimately play out in the error and omissions risk arena. One vexing question is whether professional liability
policies of attorneys and CPA's will continue to exclude a indemnification for purposes of settling specious intentional
tort claims like IIED which are brought in tandem with a malpractice action?
Loss Deductions Allowed, Basis in S Corporation Properly Increased
By Daniel D. Kopman, Esq.
Posted: June 7, 2012
Loss Deductions Allowed, Basis in S Corporation Properly Increased; Offset Permitted for Rental Real Estate Activities;
Accuracy-Related Penalty Imposed (Maguire, TCM) Two couples who were shareholders in two related corporations, an
auto dealership and a finance company, were entitled to deduct their claimed losses from their interest in the auto
dealership. Because the loss deductions were allowed, they were also entitled to the net operating loss carryback that
they each claimed. The claimed losses had been disallowed by the IRS because the loss amounts exceeded each of the
couple’s basis in the dealership. However, they sufficiently increased their basis to deduct the claimed losses when they
contributed their accounts receivable from the finance company to the dealership. The contribution of their accounts
receivable satisfied the “economic outlay” requirement for a contribution of capital because each of the couples was
materially poorer after the contribution was made.
Adjusting corporate journal entries was sufficient to increase the couples’ basis in the dealership because they were
advised to take this action by their tax professional. One of the couples, who claimed deduction for passive losses from
real estate rental activities, was allowed the deduction because the husband was active in the management of the real
estate. The phase-out limitation for the deduction did not apply because, after being entitled to deduct the losses in the
dealership that they claimed, they had a negative adjusted gross income (AGI). Although the loss deductions and the
real estate rental activity loss were allowed, the couples were found to have failed to report income interest that they
received; as well as fringe benefit income from the personal use of company-owned vehicles.
They also took charitable deductions that they were not able to substantiate and one of the couples also claimed
advertising expenses that they could not substantiate. Both couples were liable for the accuracy-related penalty
because they were negligent in failing to keep adequate books and records for the tax years at issue and in failing to
properly substantiate items on their returns.
2010 Estate Tax Retroactivity Still in Question
By Daniel D. Kopman, Esq.
Posted: October 27, 2010
Many individuals entered 2010 uncertain over the fate of federal tax incentives scheduled to expire at year-end. On
December 17, President Obama signed the Tax Relief, Unemployment insurance Reauthorization and Job Creation Act
of 2010 (H.R. 4853) after passage by the Senate on December 15 and the House on December 16th. The new law
extends, renews or enhances a large number of individual tax incentives, among the most far reaching being reduced
individual income tax rates and an across-the board payroll tax cut for 2011. This letter highlights the key individual tax
incentives in the new law. As always, please contact our office for more details.
Individual tax rates. Reduced individual tax rates put in place in 2001 were scheduled to expire after 2010. The new law
extends the reduced rates for two years. The current rate brackets (10, 15, 25, 28, 33 and 35 percent) remain
unchanged for 2011 and 2012. The new law also extends full repeal of the itemized deduction limitation and full repeal
of the personal exemption phase-out, both scheduled to expire after 2010, for two years. The extension of the reduced
individual tax rates is significant. If the old rates had returned, the top two rates would have jumped from 33 and 35
percent to 36 and 39.6 percent, respectively. The current 10 percent rate would have disappeared. Additionally,
marriage penalty relief in the form of an expanded 15 percent rate bracket would also have expired.
AMT relief. Along with extending these rate cuts, the new law targets relief to taxpayers facing the alternative minimum
tax (AMT). Because the AMT is not indexed for inflation, and for other reasons, the tax steadily encroaches on middle
income taxpayers. The new law stops this encroachment by giving individuals higher exemption amounts and providing
other targeted relief. The reach of the AMT often surprises individuals. While the provisions in the new law are helpful, it
is also important to plan strategically for the AMT. Unlike the income tax rates, the higher AMT exemption had already
expired at the end of 2009 before the new law stepped in to save it. Its two-year extension, therefore, expires earlier, at
the end of 2011.
Payroll tax cut. Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2
percent of wages up to the taxable maximum of $106,800 (in 2010 and 2011), while self-employed individuals pay 12.4
percent. Effective for calendar year 2010, the new law reduces the employee-share from 6.2 percent to 4.2 percent up
to the taxable maximum. The employer-share remains unchanged. Self-employed individuals will pay 10.4 percent on
self-employment income up to the taxable maximum. The reduction has no effect on an individual's future Social Security
benefits. Let's look at an example. Tyler, who is single, earns $106,800 (the maximum taxable wage). For 2011, the new
law reduces Tyler's share of Social Security taxes on his earnings to 4.2 percent. Tyler will see $2,136 in savings for
2011. The payroll tax cut replaces the Making Work Pay credit, which temporarily reduced income tax withholding in
2009 and 2010. The Making Work Pay credit phased-out for higher-income individuals. The payroll tax cut is across-the-
board (up to the taxable maximum of $106,800). Shortly after the new law was passed, the IRS instructed employers to
start reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31,
2011. For any Social Security tax over-withheld in January, employers should make an offsetting adjustment in an
individual's pay no later than March 31, 2011. The payroll tax cut opens up some tax planning opportunities for
individuals. The savings could be contributed to an IRA or another retirement savings vehicle, thereby compounding
available tax benefits. The savings also could be used to help fund a Coverdell education savings account. Please
contact our office for details.
Capital gains/dividends. In 2003, Congress set new maximum tax rates for qualified capital gains and dividends but, like
the individual rate cuts, these taxpayer-friendly rates were temporary. For 2010, the maximum tax rate is 15 percent
(zero percent for individuals in the 10 and 15 percent tax brackets). The new law extends these rates for two years,
through December 31, 2012. In a related development, the new law extends the temporary 100 percent exclusion of
gain on certain small business stock.
Child tax credit.</strong></em> Many individuals enjoy the benefit of the $1,000 per child tax credit. Without the new
law, the child tax credit would have dropped to $500 for 2011. The new law extends the $1,000 credit and keeps the
refundability threshold at $3,000 for 2011 and 2012. In related developments, the new law also extends some
enhancements to the earned income tax credit and the adoption credit for two years.
Estate tax. Under the new law, the federal estate tax will again apply to the estates of decedents dying after December
31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million
exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect
out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election,
and many of the other estate tax provisions in the new law, is very technical. Besides the estate tax, there are provisions
in the new law extending and modifying the federal gift tax and the federal generation skipping transfer (GST) tax.
Please contact our office so we can discuss how these changes will affect your estate planning.
Education. A variety of tax incentives are available to help save for and finance education costs. Like so many
incentives they are temporary. The new law extends some of the most popular education tax incentives. They include: •
American Opportunity Tax Credit • Higher education tuition deduction • Student loan interest deduction • Exclusion for
employer-provided educational assistance • Enhancements to Coverdell education savings accounts • Special rules for
certain scholarships The education incentives in the Tax Code are among the most complex. Often, taxpayers will
mistakenly believe they cannot claim more than one or they may inadvertently claim ones they should not. Our office
can help you sort through the complexity of the federal education tax incentives.
Individuals who made some energy-efficient improvements in 2009 or 2010 may have benefited from a special tax break.
This tax incentive rewarded individuals who installed energy-efficient windows, doors, furnaces, and other items in their
homes. The credit, while very valuable, was also very complex. The new law extends the credit but also adds to the
complexity by reinstating rules for the credit in place before 2009. The complexity is certain to confuse taxpayers.
More Incentives. The new law extends many valuable but temporary tax incentives for individuals. They include the state
and local sales tax deduction, the teacher's classroom expense deduction, and special rules for individuals who
contribute IRA proceeds to charity. Keep in mind that not all of the expired temporary individual tax incentives were
extended. Among the incentives not extended are the additional standard deduction for real property taxes, the $2,400
exclusion for unemployment benefits, the first-time home buyer tax credit, COBRA premium assistance, and some others.
Billionaires at Odds Over Tax Increases | Strange Days Indeed
By Daniel D. Kopman, Esq.
Posted: October 12, 2010
In a Kafkaesque moment in history, Billionaires, including those in the Forbes 400, are strongly at loggerheads over
proposed tax increases. Evidence of this phenomenon is seen in a triad of tax issues; the continuance of estate taxes,
income tax rates for the wealthy, and whether hedge fund managers’ income should be taxed at 15% or 35% for federal
income tax purposes. Let’s focus on the first two issues. Illustrative of this phenomenon are competing $100,000 gifts
made by each of by Microsoft CEO, Steve Balmer and Amazon creator, Jeff Bezos, on the one hand, and Bill Gates
Senior, on the other. Gates Sr., an prominent attorney in his own right, and father of Microsoft Founder, Bill Gates,
contributed one half million dollars to support ballot initiative 1098, which imposes a tax equivalent to 5% on couples with
incomes over $400,000 as well as a millionaire’s tax in the form of a 9% levy on income in excess of one million dollars.
With their gifts, Balmer and Bezos vow to oppose measure 1098.
Stalwarts, including David Koch and the Mars family, have for some time lent their financial support and imprimatur to
lobbyists and activists seeking to put an end to the estate tax once and for all which, given their wealth and number of
progeny, is not a bit shocking. But consider the fact that by contrast, many more from the ranks of the wealthy continue
to support current estate tax proposals or even more aggressive ones. The list of tax hawk proponents includes the likes
of Oracle of Omaha, Warren Buffet. Forbes recently reported that hedge fund billionaire Julian Robertson recently
stated that the fairest way to get more tax revenue to close the deficit is “to tax the least deserving recipients of wealth,
which are the inheritors.” Among those who have signed a Responsible Wealth project statement pleading for the estate
tax to be preserved are names that might surprise one, including George Soros, Ted Turner and the several issue of
Indeed, for whatever reason, the number on the list of “redsitributionists” seems to be on the uptick. Indeed, vigilant tax
avoidance billionaire-advocates like Tom Golisano, of Paychex fame, persist. After three failed attempts at a run for
Governor of New York and, following subsequent increases in the top tier New York income tax rate, Golisano finally
pulled up stakes, moving his residence to the tax-free State of Florida. Interesting stuff, but why the persistent rift in
views over taxation? It could be proof that the wealthy are not really members of the good ol’ boys club espousing the
evils of taxation as a mantra, as thought by many. Perhaps it is that at such perilous time in the history of America, with
deficits and unemployment rates soaring, personal philosophy, patriotism and moral imperatives are taking precedence,
at least for some billionaires, over greed and avarice? Who can tell?
Small Business Jobs Act Has Become Law
By Daniel D. Kopman, Esq.
Posted: September 29, 2010
The Small Business Jobs Act became controlling law on September 27, 2010, upon receiving Presidential imprimatur.
Formally known as the Small Business Jobs Act of 2010 (H.R. 5297), the Bill was approved and sent to the President for
signature on September 23, 2010. The House approval stats. - 237 to 187. By way of background, the Bill previously
cleared the Senate by a 61 to 38 margin on September 16, 2010, and this Act resulted from months of congressional
negotiation and sometimes hot debate. In titular terms, the moniker “Small Business” is somewhat of a misnomer.
As widely expected, the Bill is chock-a-block full of provisions benefiting the largest of public and privately held
corporations alike. As implied by its name, the centerpiece provisions of the Bill are general business incentives which
include, without limitation, the following: • 100% gain exclusion for qualified small business stock; • Shortening of the
holding period requirements subjecting Sub-S corporations and their shareholders to the existing Built In Gains (BIG) tax
to 5 years; • The carryback period for eligible small business credits is pushed out to five years; • Code Section 179
expensing election limits are doubled; • Extension of 50% bonus depreciation. Under prior legislation, Congress
permitted businesses to deduct a portion of their capital acquisition expenditures for most new tangible personal
property, and certain other new property, which it placed in service in 2008 or 2009 (or 2010 for certain property), by
facilitating a first-year write-off of one half of the cost. The Act extends this first-year 50% write-off for qualifying property
placed in service in 2010 (2011 for certain property).
The Act also increases the expensing limits in 2010 and 2011, and allows expensing of a portion of the costs for certain
real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail
improvement property); • Cell phones will no longer be considered Listed Property for cost recovery purposes; •
Deductions for start-up businesses are enhanced; • A self-employment tax deduction is available for 2010 health
insurance costs; • The penalty rules under Section 6707A for failure to disclose participation in certain tax shelters have
been clarified and rendered more readily calculable which may result in considerably lower penalties for some
taxpayers. The new law applies to 6707A penalties assessed after December 31, 2006. Retirement – Tax Deferral
Related Provisions The Act provides a considerable level of new flexibility to participants in dealing with retirement plans.
Certain participants’ balances in 401(k), 403(b) and 457(b) plans will be eligible for rollover into a designated Roth
account within their plans. Moreover, certain participants in 457(b) state and local government plans (excluding non-
profit entity plans) will be eligible for deferrals into Roth accounts similarly as participants in 401(k) and 403(k) plans are
eligible under per-existing law.
New annuity provisions permit certain owners of non-qualified annuities (meaning owners of contracts are owned outside
of an IRA or qualified plan) to enjoy an option to fractionalize their annuity contract in a manner so as to disaggregate
the annuity payment stream from the contract balance, which provides for some interesting tax planning opportunities.
This change applies to annuity payments received in tax years commencing on or after January 1, 2011. Tax Revenue
Impact The Revenue impact of many provisions of the Act means foregone dollars in the public disk, projected to range
in the tens of billions of dollars in the near term. While, in this writer's opinion, such amounts are inestimable within any
degree of precision, an equal opaqueness surrounds whether the objective of economic stimulus which inspired the Act
will be achieved. Enthusiasts of economic recovery are depending upon it. Bear in mind that at least some of the new
provisions are projected by the Joint Committee of Taxation to provide increased tax revenues such as the retirement
savings provisions and limitations on eligibility for cellulosic biofuel producer credit. In summary, the foregoing provisions
of the new Act and many not referenced in this blog will provide tax planning opportunities for small and large
businesses alike, at a time when they may be more necessary than merely welcome. Readers are encouraged to
consult with their tax advisors for more details. .
The Low Down on Short Sales. You Already Know the Good: What About the Bad and the Ugly?
By Daniel D. Kopman, Esq.
Posted: September 14, 2010
We all know that most short sales of real estate in Southern California fail to come to fruition. Most often, the failed
transactions lead to frustrated buyers ultimately deciding to move on to the next deal, real estate agents wasting
inordinate amounts of time without recompense, and sellers who cannot avoid foreclosure proceedings, bankruptcy and
eviction. The property which is at issue then subsequently surfaces as a REO listing. There are a number of factors
which conspire to bring about this result.
These factors, while not an exhaustive list, include financial institutions with mitigation departments which are poorly
staffed, typified by high turnover and bureaucracy to the point of decision paralysis. Under-water unmotivated holders
of second, third and even fourth deeds of trust are in the picture. They risk having their interest partially or totally wiped
out. Indeed, they may believe they have little reason to cooperate. Short sale target properties, by reason of what
brought them to such a state in the first place, are also often plagued with income tax liens and property tax arrearages,
all of which must be paid off by someone or, alternatively, discharged before escrow can be closed.
Such encumbrances are often deal killers but, as discussed below, they needn’t be. Other problems include an
expanding cast of characters, including folks calling themselves “short sale” specialists, who purport to work with sellers’
agents in exchange for a portion of the listing agent’s commission. Agents faced with the prospect of sharing
commissions which are often already lower than commissions than they would receive in arms- length transactions,
maybe less motivated to invest the time and energy needed to get the project completed. This is classic human
behavior. If good at their job, short sale specialists function like Sherpas guiding the parties through the thicket of
uncertainty- in such capacity the become key players in making the sale happen.
The “specialist” title here is self-anointed, lacking in formal licensing or credentials separate and apart from a general
real estate agent’s license. For every skilled specialist, there are probably four or five others who are largely clueless
about the whole process or are simply ill equipped to be helpful for a variety of reasons. For many specialists who
purport to know what they are doing, they are poorly equipped and understaffed to handle the volume of cases they
undertake. This is because the short sale specialists’ game is decidedly low-margin and high-turnover. Other problems
include sellers with their own agenda who unethically utilize the process to drag out their free living arrangements and
who may otherwise be lacking in full commitment to the task of completing the sale. Others hope to hold out for side
deals with one eye continuously looking to the door for another buyer to walk in and who may be willing to sweeten the
deal by paying the seller a tidily greater sum of cash simply as impetus to complete the transaction and vacate the
Once in contract some sellers feign false reasons to cancel escrows thusly torpedoing deals at their fiat should another
buyer come along who is ready and willing to pay a larger bounty. Aside from the ethical issues plaguing short sales,
one of the largest problems in completing these transactions is the juggling of authorizations and clearances from
lending institutions bearing different expiration dates and, of course, partially or completely non-responsive lenders. The
transactions with the greatest probability of success are those in which the deal has been per-negotiated with all
mortgagees and lienors, including commissions and all transaction fees, before the properly is listed on the multiple
listing service and where the listing price properly reflects that value. OK, so most of us are aware of the foregoing
factors. But how can one stack the odds in favor of completing a short sale. First, education of the buyer and seller on
the process and counseling in patience and flexibility is important.
Too many deals falter simply because the short term expectations of the bargaining parties are not satisfied. But also
due to the overwhelming conflicts of interest which exist or can come into play during negotiations and escrow, one
would be ill-advised to maintain dual agent representation. Each of buyer and seller are best independently
represented. Second, it is crucial to investigate the background of the short sale specialist with whom you plan to work.
Query numerous agents in your market for referrals and, importantly, follow up assiduously with those referrals. While
somewhat anomalous, if the listing agent is willing to invest significant ramp up time, it may be possible to complete the
transaction without a specialist. I lean toward using one, however, with the important caveat that a qualified and
experienced specialist is crucial to success.
Pro activity by both agents is essential. The specialist should be authorized and instructed to be candid and open with
both agents on procedural matters and not withhold important information and developments. Disclosure agreements
with the parties may be useful or important to obtain. Agents themselves have to remain abreast of the status of the
transactions at all times, right down to expunging the last encumbrance on the property. This can be time consuming,
but the standard of care applying to real estate professionals and fiduciaries commands as much. The buyer should
consider offering the seller an incentive to vacate the property at the close of escrow. I am aware of short sales in which
escrow closed with the seller still in possession. This is often a huge mistake. The buyer effectively purchased a home
and, along with it, an unlawful detainer lawsuit. Come to terms on a small financial carrot to entice seller to vacate. The
dangling fruit is not paid until the buyer confirms with escrow that he or she is in possession of the property post-escrow
closure. This amount should not be so large as to have the appearance of conspiring to pay seller money a la carte.
Compromising banks will undoubtedly request a written confirmation to the contrary.
The sale of personal property and an ancillary personal property sales contract, if reasonable in amount, would likely
support a payment made in good faith, if above board. If possible, obtaining approval by seller’s secured lenders is
advisable. If seeking to buy property for sums which are under fair market value, impatient buyers with weak stomachs
would best be served looking at REO properties instead of short sales. However, a well priced short sale may offer a far
better opportunity to purchase property at deeper discounts to market value. If well orchestrated, a short sale can yield
a nice bargain or even a windfall. If you are seeking out short sales for investment purposes, consider having more
than one in the works simultaneously to improve the odds of completing at least one. A contingency clause must be
carefully drafted to avoid exposure to a breach of contract lawsuit if joint, or even multiple deals come through
contemporaneously. Knowledge is referent power. Know what is happening with the bank by selecting a quality
specialist and keep the client informed and counseled. Avoid double ending short sales. Listing agents should inform
clients who may be inclined to shop for buyers who will pay them more cash on the side, of the legal and ethical
problems of doing so once in contract. Buyers should be on alert for sellers who may be predisposed to back out with
little to no warning when another good thing comes along.
Once in contract, a seller trying to back out under false pretenses would be advised to consider that they may be faced
with a lawsuit and recordation of a notice of pendency of proceeding, or lis pendens, against the property which is likely
a seller’s one-way ticket to foreclosure or bankruptcy. Check title early and often. Negotiations should commence
immediately on eliminating income tax liens. If the seller holds no equity in the property, the IRS and Franchise Tax
Board may be inclined to release liens. However, this process takes time. Failure to commence the process early can
cause the clock to run out on the letters of approval the banks provide, which nearly always have short expiration dates
anyway and must be continually renegotiated. Separate and apart from the implicit financial advantages of short sales
and, while they are challenging, they can be an intrinsically rewarding experience.